A vertical merger brings together firms in potential customer-supplier relationships, such as that between a firm that provides wholesale or intermediate products to a firm that produces retail or final products.
Vertical mergers are generally considered beneficial. Vertical mergers can:
- Reduce transaction costs by streamlining the process of acquiring and converting inputs into outputs,
- Improve efficiency through more integrated production, and
- Eliminate the potential for a “double markup”, which can occur where there is market power at both the wholesale and retail stage of the market.
Vertical mergers may raise competition concerns in limited sets of circumstances.
A vertical merger may “foreclose” the market by preventing non-integrated retail competitors from staying and competing in the market. Foreclosure generally requires pre-existing market power at one or more levels in the new vertically integrated firm. For example suppose that a firm controlling an essential facility at the wholesale level merges with a retailer. The merged firm may withhold supply of the essential facility to its retail competitors, preventing them from competing.
Alternatively, a vertical merger may be motivated by the goal of raising rivals’ costs. For example, suppose a retail firm merges with the supplier of a wholesale input. By removing a source of supply from the wholesale stage of the market, the retailer is able to increase the price of the input to its competitors (but not itself).
Analysing Vertical Mergers
Analysis of vertical mergers focuses around the two areas of concern above. Competition authorities in the Unites States typically pay attention to three issues (see Figure 1). Could the merged firm:
- Raise the costs of its retail rivals? If it can, the remedy is a requirement that the wholesale resource be made available at non-discriminatory prices.
- Misuse competitively sensitive information gathered about rivals when selling them the wholesale resource? If it can, the remedy is to implement rules and procedures to prohibit information-sharing between the firm’s retail and wholesale operations.
- Foreclose retail competitors from the market by exercising market power at the wholesale stage of the market? If it can, the remedy is to require the merged firm to provide equal access to the wholesale resource to its non-integrated retail-stage competitors.
Figure 1: Analysing Vertical Mergers
