CHAPTER 2. SUBSTANTIVE ASSESSMENT OF MERGERS
2.2. Theories of harm in case of various types of mergers
2.2.2. Theories of harm in case of vertical mergers
Generally, mergers which integrate the merging firms vertically comprise more pro-competitive than anti-competitive effects. Vertical integration may have benefits for consumers through efficiency gains, in particular by reducing transaction costs and eliminating double marginalization108, which may in turn enable prices to be lower for end users. Therefore, vertical mergers are seen mostly as efficiency enhancing and beneficial to consumers.109
106 Ibid., sections 52–55.
107 Rill, et al.
108 Double marginalization occurs when downstream firms mark up over their marginal cost, which because of market power upstream exceeds the marginal cost of the upstream producer, hence creating a mark up on mark up (or double marginali-zation). A vertical merger in these circumstances would eliminate the wholesale market transaction and one of the mark ups, reducing the marginal cost downstream, resulting in both a lower price downstream and increased profits.
109 Church, Jeffrey: “The Impact of Vertical and Conglomerate Mergers on Com-petition”, final report for DG for Competition, European Commission, September 2004.
Available online: http://ec.europa.eu/comm/competition/mergers/studies_reports/merger_
impact.pdf (last visited 15.05.2009).
Lindsay, Alistair; et al: “Unilateral effects”, ICN Report on Merger Guidelines, Chapter 3, April 2004, section 6.4. Available online: http://www.internationalcompetitionnetwork.org/
media/library/conference_2nd_merida_2003/amg_chap3-unilateral.pdf (last visited 15.05.
2009).
However, some vertical mergers raise anti-competitive concerns. Generally, vertical mergers only give rise to competition concerns if one or more merging firms possess market power in one or more markets along the supply chain.110 Similarly with horizontal mergers, the anticompetitive effects of vertical mergers can be divided into two broad categories – non-coordinated effects and coordinated effects.111
Non-coordinated effects may principally arise when non-horizontal mergers give rise to foreclosure, i.e., where actual or potential rivals’ access to supplies or markets is hampered as a result of the merger. Such foreclosure may dis-courage the entry or expansion of rivals or endis-courage their exit. Foreclosure can be found even if the foreclosed rivals are not forced to exit the market, because the rivals may be disadvantaged and consequently led to compete less effectively. Due to such foreclosure, the merging firms and, possibly, some of their competitors as well, may be able to profitably increase the price.112
It is possible to distinguish two forms of foreclosure – input foreclosure and customer foreclosure. Input foreclosure occurs where the merger is likely to raise the costs of downstream rivals or where the merger likely enables the merged entity to exclude the downstream rivals completely from access to inputs.113 Customer foreclosure occurs where the merger is likely to foreclose upstream rivals by restricting their access to a sufficient customer base.114
It is also recognized that in certain circumstances, vertical integration resulting from vertical mergers could create competitively objectionable barriers to entry.115 This problem could occur where (i) the degree of vertical integration between the two markets is so extensive that entrants to one market (the
“primary market”) also would have to enter the other market (the “secondary market”) simultaneously; (ii) the requirement of entry at the secondary level makes the entry at the primary level significantly more difficult and less likely to occur, and (iii) the structure and other characteristics of the primary market are otherwise so conducive to anti-competitive performance that the increased difficulty of entry is likely to affect its performance.116
Coordinated effects in case of vertical mergers are similar to coordinated effects in case of horizontal mergers. Namely, vertical mergers could have the
110 Bishop & Walter, p. 288.
111 Commission Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings, O.J. C 265, 18.10.2008, pp. 6–25 (EC non-horizontal merger guidelines), section 17.
112 EC non-horizontal merger guidelines, sections 18 and 29; Bishop & Walter, pages 288–289.
113 EC non-horizontal merger guidelines, sections 30; Church, pp. 6–8.
114 EC non-horizontal merger guidelines, sections 30.
115 US Non-Horizontal Merger Guidelines, originally issued as part of “U.S.
Department of Justice Merger Guidelines”, June 1984, section 4.21. Available online:
http://www.usdoj.gov/atr/public/guidelines/2614.htm (last visited 15.05.2009), (US non-horizontal merger guidelines); UK merger guidelines, section 3.68.
116 US non-horizontal merger guidelines, section 4.21.
effect of facilitating collusion.117 For instance, where manufacturers are vertically integrated with retailers, they are more likely to be informed about the final prices. This makes it easier to monitor prices, which is why coordinated effects may be more likely to occur. In general, the conditions for evaluating the likeliness of coordinated effects in case of vertical mergers are the same as in case of horizontal mergers.118
As in the case of horizontal mergers, the understanding of possible harmful effects of vertical mergers is rather universal and the underlying rationale can be applied alike in the EU merger control and in the merger control of small economies. Again, the weight given to particular elements and concerns could be the source of divergences.
A point to note in case of small economies with respect to vertical effects is that the small size of the markets may tend to result in stronger tendency to vertical integration.119 In Estonia, for instance, the independent companies operating on various non-banking financial markets (e.g., pension funds) appear to have had difficulties competing with the subsidiaries of banks. The banks have an advantage of minimal efficient scale while operating the pension funds because the gains of their main activities can be used on neighbouring markets.120 With respect to vertical mergers, strong tendency for vertical inte-gration can be noticed in the pharmaceutical trading sector. In fact the only merger prohibited in Estonia thus far, was blocked mainly due to vertical foreclosure concerns.121
In order to be able to benefit the most from the market expanding effect of trade, it is of particular importance for small economies to ensure the openness of distribution systems.122 Therefore, where a merger has the effect of foreclosing access to distribution systems for potential entrants or importers, it should not be favoured.
Hence, while the theories of harm in case of vertical mergers can be applied similarly in large and small economies, the latter may experience the tendency to stronger vertical integration and should be particularly wary of it.
117 EC non-horizontal merger guidelines, sections 19; Cook & Kerse, page 166.
118 EC non-horizontal merger guidelines, sections 79–90.
119 OECD Estonia, p. 4.
120 OECD Estonia, p. 4.
121 Decision of Estonian Competition Authority of 18.05.2008, Case No. 3.1-8/08-020KO – Terve Pere Apteek OÜ/ OÜ Saku Apteek. Available online (in Estonian):
http://www.konkurentsiamet.ee/public/Koondumised/2008/ko2007_32.pdf (last visited 15.05.2009).
122 Ibid; OECD Denmark, p. 2; OECD Global Forum on Competition: “Switzerland – Special Aspects of Competition Policy in Small Economies”, CCNM/GF/COMP/
WD(2003)18, January 2003, p. 4. Available online: http://www.oecd.org/dataoecd/58/
22/2486055.pdf (last visited 15.05.2009), (OECD Switzerland);
OECD Global Forum on Competition: “Malta – Competition Policy in Small Econo-mies”, CCNM/GF/COMP/WD(2003)32, January 2003, p. 7. Available online:
http://www.oecd.org/dataoecd/57/8/2486833.pdf (last visited 15.05.2009), (OECD Malta).
2.2.3. Theories of harm in case of conglomerate mergers