The Federal Trade Commission’s now-abandoned 2020 Vertical Merger Guidelines were not some ideal economic document that the FTC foolishly disregarded; rather, they failed spectacularly and were properly retracted, Hal Singer and Marshall Steinbaum write in their response to Herbert Hovenkamp and Carl Shapiro. 

As economists who filed separate comments opposing the 2020 Vertical Merger Guidelines (VMGs), we were befuddled by the hostile reaction in last week’s Herbert Hovenkamp and Carl Shapiro piece, admonishing the Federal Trade Commission (FTC) for retracting the VMGs. The VMGs were a hot mess, reflecting the pro-monopoly preconceptions of the antitrust defense bar and ignoring the popular antitrust zeitgeist to slow down the merger train. To wit, through August 2021, the number of mergers reported to the Department of Justice (DOJ) and FTC (2436) was more than in all of 2020 (2023) and more than twice as many as in 2010 (1166).

Although Hovenkamp has consistently supported the 2020 VMGs, Shapiro filed comments to the FTC in March 2020 pointing out the VMGs’ myriad flaws: 

  • “The Draft VMGs do not provide an economic basis for these market share thresholds, which appear to be arbitrary. … I am concerned that using market shares in this manner could well weaken vertical merger enforcement.”
  • “The fundamental problem with the way that the Draft VMGs use market shares is that they simply assume that harm to downstream customers is less likely if the merged firm controls a smaller share of the relevant downstream market.”
  • “First, the Agencies should clarify that evaluating the likely economic effects of a proposed vertical merger does not require defining a relevant market containing the ‘related product.’ Doing so often will be unnecessary and could well be misleading.”

Yet there is not a whiff of these concerns in their ProMarket piece, creating the false impression that the now-abandoned 2020 VMGs were some ideal economic document that the FTC foolishly disregarded. Having been on the losing side of the AT&T/Time Warner merger, and having seen his predictions at the time proven right by AT&T’s subsequent withholding of Time Warner’s content from paid-TV rivals, one would think that Shapiro would champion reform that created new pathways for antitrust enforcers against vertical mergers. By pushing back so hard on the FTC under Lina Khan’s stewardship, however, Shapiro has been driven into a reactionary position. 

Rather than commend the FTC for abandoning this pro-merger document, Hovenkamp and Shapiro strangely condemned the bases on which the VMGs were retracted. They begin their critique lamenting how, by unilaterally withdrawing the VMGs, the FTC has created daylight with its sister antitrust agency, which declined to retract. By appointing Lina Khan (FTC), Tim Wu (National Economic Council), and Jonathan Kanter (DOJ) to top competition posts, however, the Biden administration has made clear that it wants to break from the Democrats’ neoliberal, pro-monopoly past. We have every reason to suspect that once Kanter takes the helm at DOJ’s Antitrust Division, the VMGs will be retracted there as well. Hovenkamp and Shapiro’s fear of “unnecessary uncertainty for the business community” should be alleviated shortly. And throughout this episode, a good way to preserve business certainty has always remained intact: don’t propose a vertical merger.

Next, the authors claim that the “FTC acted without the benefit of any public comment,” which is inconsistent with the agency’s “transparency rhetoric.” This is demonstrably false, as indicated by Shapiro’s FTC comments on the VMGs above. Everyone has had a chance to speak their piece on the VMGs. Another round of comments would have created no incremental knowledge. 

Hovenkamp and Shapiro save their sharpest critiques for the FTC’s handling of elimination of double marginalization (EDM), an efficiency defense trotted out in most vertical mergers. EDM is the idea that, under certain conditions, a vertically integrated monopolist will charge a lower price to customers 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 those conditions are rarely satisfied outside of Judge Robert Bork’s blackboard. Thus, the FTC raised questions about its relevance in the press release retracting the VMGs.

As several industrial organization economists (including each of us) noted in their FTC filings, the VMGs “devote an entire section to EDM (section 6), separate and apart from a standalone section on merger efficiencies (section 8). This position was too charitable to EDM and would have been predictably be seized on by merging parties.” Instead of presuming EDM generally applies, the agencies should recognize the results obtain only under specific fact patterns, and should be subject to the same tough criteria as other claimed efficiencies—that they be merger-specific, verifiable, and at least partially passed on to consumers. Merger specificity implies a presumption that EDM can be solved nonlinear pricing. Indeed, Shapiro noted in his own comments that “I support an approach under which EDM, like all other efficiencies, must be shown to be cognizable before it can be credited.” By presuming the EDM generally applies, the VMGs do not reflect Shapiro’s preferences. 

Hovenkamp and Shapiro tee off on the description of when EDM applies in the FTC’s press release—as if the press release will ever be cited in a merger proceeding. In particular, they assert that there is a consensus in the economics profession that EDM can apply “regardless of whether the downstream production process involves fixed proportions.” As a result of the FTC’s lack of sophistication, the authors explain, “we have the spectacle of a federal agency basing its policies on a demonstrably false claim.” (emphasis added). Yet noted economists Margaret Slade and John Kwoka—among others—recently outlined the strong assumptions of the basic EDM model in the journal Antitrust. Variations in assumptions about transfer pricing, multi-product firms, 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 largely irrelevant curiosity. “The above description of EDM does not hold, however, when the downstream stage is subject to variable proportions, for in this case, the unintegrated downstream firm can avoid some of the adverse effects of the inflated wholesale price by substituting away from use of that product.” We won’t resolve the technical issue here, but suffice it to say that there is no consensus in the economics community on this narrow issue. And moreover, the idea that the right enforcement policy for vertical mergers depends on precisely which theoretical assumptions are required for a certain generic benefit to be realized is taking antitrust policy debate in the wrong direction when it should be focused on the actual empirical effects of vertical mergers.

“the idea that the right enforcement policy for vertical mergers depends on precisely which theoretical assumptions are required for a certain generic benefit to be realized is taking antitrust policy debate in the wrong direction when it should be focused on the actual empirical effects of vertical mergers.”

One of the main shortcomings of the 2020 VMGs the FTC has now abandoned is that they take the “verticality” of any given proposed vertical merger as a given. Yet actual existing mergers do not have such well-defined supply chains: Consider 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. Both mergers were not challenged when they were first proposed, on the basis that there was no demonstrated harm to either platform competition or in the “downstream” market because the merging parties did not compete prior to the merger. In those types of cases, the merging parties are effectively benefiting from the giant safe harbor that EDM creates in the law, when it manifestly does not apply in those instances. And ex post, we know that what happened was the expansion of the dominant platform’s operations in ways that make it more difficult for upstream suppliers to reach customers without dealing on the platform’s terms. When the VMGs are revisited, we expect this issue will be given much greater attention, and rightly so. 

Meanwhile, Hovenkamp and Shapiro’s piece offers nothing in the way of understanding the competitive effects of acquisitions by dominant platforms, which renders their contribution tantamount to demanding that the agency march back into the past while the majority of its commissioners recognize the need for significant ideological and legal re-thinking. 

Commenting on Hovenkamp and Shapiro’s piece on Twitter, Tommaso Valletti, former chief economist of Directorate General for Competition (DG COMP), was also perplexed as to why the authors would fixate on the agency’s press release, when the larger issue is how antitrust enforcers cannot stop anticompetitive vertical merger under current law. He explains: 

“The bigger picture is that we block virtually no merger involving large corporations, and especially so when it comes to vertical stuff. There’s currently *in practice* a large procedural advantage to merging parties due to the alleged elimination of double marginalization (EDM). But where’s the *evidence* of those efficiencies from past transactions? Do [Hovenkamp and Shapiro] look at what’s happened in practice? … The 1st order effect is the loss of competition: efficiencies cannot rescue an unlawful deal, what’s wrong with that? Are [Hovenkamp and Shapiro] more offended by the @FTC action than by actual illegal mergers?”

Put differently, Hovenkamp and Shapiro miss the forest for the trees. There is no stopping anticompetitive vertical mergers under current law. Short of new antitrust legislation creating presumptions against acquisitions by dominant platforms, the best shot enforcers have is for the agencies to issue anti-monopoly guidelines that create new pathways for agencies to succeed. By embracing the pro-monopoly preferences of the antitrust defense bar, the 2020 VMGs failed spectacularly in that dimension and were properly retracted by the FTC. It’s too bad Hovenkamp and Shapiro didn’t say that.

Disclosure: Marshall Steinbaum has consulted for Towards Justice on antitrust matters. Hal Singer has litigated against Apple and Google in matters unrelated to the vertical merger guidelines. He has previously consulted Apple in a copyright dispute in Canada. He has also consulted for AT&T and Dish in matters unrelated to the T-Mobile/Sprint merger. His firm is involved in litigation and regulatory matters in which tech companies are an adverse party.

Editor’s note: The authors’ disclosures have been updated after publication.