A response to Hovenkamp and Shapiro
The Federal Trade Commission’s 2020 Vertical Merger Guidelines, now abandoned, were not an ideal economic document that the FTC stupidly ignored; on the contrary, they failed spectacularly and were correctly retracted, write Hal Singer and Marshall Steinbaum in their response to Herbert Hovenkamp and Carl Shapiro.
As economists who have filed separate comments opposing the Vertical Merger Guidelines (VMG) 2020, we were baffled by the backlash in Herbert Hovenkamp and Carl Shapiro’s article last week berating the Federal Trade Commission (FTC) for retracting VMGs. The VMGs were a burning mess, reflecting the pro-monopoly preconceptions of the antitrust defense bar and ignoring the popular antitrust zeitgeist to slow the merger train. Namely, until August 2021, the number of mergers reported to the Department of Justice (DOJ) and the FTC (2,436) was more than for all of 2020 (2023) and more than double than in 2010 (1,166).
While Hovenkamp has always supported VMG 2020, Shapiro filed comments with the FTC in March 2020 highlighting the countless shortcomings of VMGs:
- âVMG’s projects do not provide an economic basis for these market share thresholds, which seem arbitrary. â¦ I fear that using market share in this way may well weaken execution of vertical mergers.
- âThe fundamental problem with how VMG projects use market share is that they simply assume that harm to downstream customers is less likely if the merged company controls a smaller share of the affected downstream market. “
- âFirst, agencies should clarify that assessing the likely economic effects of a proposed vertical merger does not require defining a relevant market containing the ‘related product’. Doing this often will be unnecessary and may well be misleading. “
Yet there is not a whiff of these concerns in their ProMarket coin, creating the false impression that the now-discontinued VMG 2020s were an ideal economic document that the FTC foolishly ignored. Having been on the losing side of the AT&T / Time Warner merger, and having seen his predictions at the time proven by AT&T’s subsequent restraint of Time Warner’s content from pay-TV rivals, one would think Shapiro would champion reform. which created new avenues for antitrust authorities against vertical mergers. However, by pushing the FTC so hard under Lina Khan’s leadership, Shapiro was pushed into a reactionary position.
Rather than congratulating the FTC for dropping this merger-friendly document, Hovenkamp and Shapiro strangely condemned the plinths on which the VMGs have been retracted. They begin their criticism by bemoaning how, by unilaterally removing VMGs, the FTC has created the light of day with its sister antitrust agency, which has refused to retract. By appointing Lina Khan (FTC), Tim Wu (National Economic Council) and Jonathan Kanter (DOJ) to the top positions in the competition, however, the Biden administration made it clear that it wanted to break away from the neoliberal and pro -monopoly of the Democrats. . We have every reason to believe that once Kanter takes over as the head of the DOJ’s antitrust division, the VMGs will be retracted there as well. Hovenkamp and Shapiro’s fear of âunnecessary uncertainty for the business worldâ should be alleviated shortly. And throughout this episode, a good way to preserve trade security has always remained intact: not to propose a vertical merger.
Second, the authors claim that the “FTC acted without the benefit of any public comment,” which is inconsistent with the agency’s “rhetoric of transparency.” This is patently false, as indicated by Shapiro’s FTC comments on VMGs above. Everyone had the chance to express themselves on the VMGs. Another round of comments would not have created any additional knowledge.
Hovenkamp and Shapiro reserve their harshest criticisms of the FTC’s handling of the elimination of double marginalization (EDM), an efficiency defense put forward in most vertical mergers. EDM is the idea that under certain conditions a vertically integrated monopolist will charge customers a lower price than it would in the absence of integration because it avoids having to pay a monopoly markup. on the input. Fair enough. But economists have come to recognize that these conditions are rarely met outside of Judge Robert Bork’s blackboard. Thus, the FTC questioned its relevance in the press release retracting the VMGs.
As several economists from industry organizations (including all of us) noted in their statements to the FTC, VMGs âdevote an entire section to EDM (section 6), separate and separate from a section. stand-alone on the effectiveness of mergers (section 8). This position was too charitable for EDM and would have been, predictably, seized by merging parties. Instead of assuming that EDM generally applies, agencies should recognize results achieved only according to specific fact models and should be subject to the same strict criteria as other claimed efficiencies: whether specific to the merger, verifiable and at least partially transmitted to consumers. The specificity of the merger implies a presumption that EDM can be solved with non-linear pricing. Indeed, Shapiro noted in his own comments that âI support an approach where EDM, like all other efficiencies, must be shown to be recognizable before it can be credited. âAssuming EDM generally applies, VMGs do not reflect Shapiro’s preferences.
Hovenkamp and Shapiro jump into the description of when EDM applies in the FTC press release, as if the press release were ever cited in merger proceedings. In particular, they claim that there is a consensus in the economics profession that EDM can be applied “regardless of whether the downstream production process involves fixed proportions”. Due to the FTC’s lack of sophistication, the authors explain, âwe have the spectacle of a federal agency basing its policies on an obviously false claim. (emphasis added). Yet renowned economists Margaret Slade and John Kwoka, among others, recently highlighted the strong assumptions of the basic EDM model in the review. Antitrust. Variations in the assumptions about transfer pricing, multiproduct firms, the oligopoly at various stages, and the assumption of a fixed proportion production process at the downstream stage can easily turn the neat theoretical result into a curiosity largely outside. about. âThe above description of EDM does not hold, however, when the downstream stage is subjected to varying proportions, because in this case, the unintegrated downstream firm can avoid some of the negative effects of the price of big inflated by replacing the use of this product. “We will not resolve the technical issue here, but suffice to say that there is no consensus in the economic community on this narrow issue. idea that the right enforcement policy for vertical mergers depends precisely on the theoretical assumptions required for some generic advantage to be realized takes the debate on antitrust policy in the wrong direction when it should focus on the actual empirical effects vertical mergers.
One of the major shortcomings of VMG 2020 that the FTC has now abandoned is that they take the âverticalityâ of any proposed vertical merger as given. Yet existing mergers don’t have such well-defined supply chains: think Amazon’s acquisition of Whole Foods or Facebook’s acquisition of Instagram. In each case, a dominant platform in one market segment appears to be expanding its offerings in another. The two mergers were not contested when they were first proposed, on the grounds that there was no demonstrated prejudice to platform competition or to the ‘downstream’ market because the parties to the merger were not in competition before the merger. In this type of case, the parties to the merger effectively benefit from the giant safe harbor that EDM creates in the law, while it clearly does not apply in these cases. And a posteriori, we know what has happened is the expansion of the dominant platform’s operations in a way that makes it harder for upstream vendors to reach customers without dealing on platform terms. -form. When VMGs are revisited, we expect this issue to receive a lot more attention, and rightly so.
Meanwhile, Hovenkamp and Shapiro’s article offers nothing on how to understand the competitive effects of acquisitions by dominant platforms, making their contribution tantamount to demanding that the agency go back in time when the majority of its commissioners recognize the need for major ideological efforts and legal overhaul.
Commenting on Hovenkamp and Shapiro’s article on Twitter, Tommaso Valletti, former chief economist at the Directorate-General for Competition (DG COMP), was also puzzled as to why the authors would focus on the agency’s press release, when the bigger issue is how antitrust authorities cannot stop anti-competitive vertical mergers under current law. He explains:
âThe big picture is that we hardly block any mergers involving large companies, and especially when it comes to vertical products. There is currently * in practice * a great procedural advantage to merging the parties due to the alleged elimination of double marginalization (EDM). But where is the * evidence * of these efficiency gains from past transactions? Make [Hovenkamp and Shapiro] look at what happened in practice? â¦ The first-order effect is the loss of competition: efficiency gains cannot save an illegal deal, what’s wrong with that? Are [Hovenkamp and Shapiro] more offended by the @FTC action than by genuine illegal mergers? “
In other words, Hovenkamp and Shapiro miss the forest for the trees. There is no stopping anti-competitive vertical mergers under current legislation. Unless new antitrust legislation creates presumptions against acquisitions by dominant platforms, the best way for law enforcement agencies is for agencies to issue anti-monopoly guidelines that create new avenues for agencies to succeed. By embracing the pro-monopoly preferences of the antitrust defense bar, the 2020 VMGs failed dramatically in this dimension and were properly retracted by the FTC. It’s a shame Hovenkamp and Shapiro didn’t say that.
Disclosure: Marshall Steinbaum consulted for Towards Justice on antitrust matters.