On 22 December 2020, on a divided vote, the Federal Trade Commission (FTC or the Commission) issued a Commentary on Vertical Merger Enforcement (FTC Commentary) to provide “greater transparency to the public regarding its analysis of vertical mergers.” Following the FTC and Department of Justice’s (DOJ) publication of new Vertical Merger Guidelines in June 2020 (the 2020 Vertical Guidelines), the FTC Commentary provides analysis of a number of the vertical merger cases the agency has adjudicated over the past 25 years, offering insights on the Commission’s handling of vertical merger issues and “describing the principal analytical techniques, practices, and enforcement policies” the Commission utilizes to determine whether a vertical merger poses potential competitive harm in violation of the antitrust laws.
Interplay with Horizontal Merger Analysis
The Commentary notes that many vertical mergers have both vertical and horizontal aspects, “such as when a vertically integrated firm seeks to acquire a firm that is a competitor in one market and a customer or supplier of a related product.” In such instances, the Commission will use the approaches in both the Horizontal and Vertical Merger Guidelines to determine whether the merger harms competition, including by reducing the likelihood of future competition from a potential entrant to the market. As an example, the Commentary cites a case involving a proposed transaction between a retailer and a wholesaler that raised vertical concerns about whether the combined firm would have an incentive to raise wholesale prices to the wholesaler’s downstream customers, but also raised concerns that the transaction eliminated potential future horizontal competition between the parties since the retailer had considered offering wholesale services to third parties before the proposed merger.
In mergers that encompass solely vertical elements, the Commission has focused its competitive effects analysis on whether the merger’s impact on competition in the downstream market will result in foreclosing or raising the cost of rivals’ access to the upstream input. The FTC Commentary cites examples of cases involving upstream inputs “critical to competition occurring in a downstream market.” These cases include the acquisition of an upstream licensor of intellectual property rights by one of its downstream licensees, or the combination of an upstream producer and its rivals’ downstream distributor. The FTC Commentary also notes that the Commission will look at vertical effects arising from “diagonal” mergers (where firms or assets are combined at different stages of a competing supply chain) as well as mergers of producers or sellers of complements (where demand for one product increases when the price of another product falls).
The FTC’s Vertical Merger Review Process
The FTC Commentary cites specific examples to illustrate key elements of its vertical review analysis. Below is an overview of the key elements the Commission considers when deciding whether a vertical merger violates the antitrust laws.
Foreclosure and raising rivals’ costs
The Commission evaluates whether a vertical merger may harm competition in a relevant market by looking at whether the combined firm will be able to withhold related product from rivals (foreclosure) or raise the product’s price or decrease its quality (raising rivals’ costs) and assessing the likely net effect on competition (after considering potential efficiencies). It examines the following factors:
- Does the merged firm have the ability to disadvantage its rivals by changing the terms on which a related product is provided to one or more of its rivals? A firm’s “ability to disadvantage” rivals is assessed by examining whether rivals are able to readily switch to an alternative to the related product “without any meaningful effect on the price, quality, or availability” of the product in the relevant market?
- Does the merged firm have an incentive to raise its rivals’ costs or foreclose rivals from access to the related product? The Commission may look at the merged firm’s share of the downstream market and the extent to which sales lost by rivals would be diverted to the merged firm’s products in the relevant market.
- What are the net effects of the vertical merger on competition? Will the downstream prices be higher as a result of the transaction? Will the vertical merger result in the elimination of double marginalization?
The Commission also analyzes barriers to entry for future competitors, looking at whether a vertical transaction could make entry into the relevant markets more difficult for a competitor because “entry would be required at more than one level” for the competitor to be truly competitive.
Access to competitively sensitive information and coordinated effects
In assessing the potential anticompetitive effects of a merger, the Commission also looks at whether a combined firm will have “access to and control of sensitive business information about its upstream or downstream rivals that was unavailable to it before the merger.” The FTC Commentary cites a number of cases where a combined firm’s access to competitively sensitive information was found by the Commission to be integral to its vertical merger analysis. For example, the Commission challenged a proposed merger between a leading office supply retailer and wholesaler based on the fact that the retailer would gain access to commercially sensitive information about competing resellers supplied by the wholesaler. The Commission notes that “with knowledge of [the Wholesaler-supplied] reseller’s cost of goods, [the retailer] may have been able to offer higher prices than it otherwise would when bidding against that reseller for an end customer.” The Commission also looks at whether shared access to confidential or competitively sensitive information may lead to post-merger coordinated interactions among firms in the relevant market.
The Commission evaluates efficiencies associated with the combination of complementary assets in vertical transactions pursuant to the approach outlined in Section 10 of the Horizontal Merger Guidelines. The FTC Commentary states that “as with horizontal transactions, the Commission is unlikely to challenge a vertical merger if cognizable efficiencies are of a character and magnitude such that the merger is unlikely to lead to anticompetitive effects in any relevant market.” Examples cited in the FTC Commentary include cases where the Commission allowed transactions to proceed where customers supported the deal due to expected efficiencies in the form of improved products.
Another potential procompetitive effect of a proposed vertical transaction is the benefit to consumers from the elimination of double marginalization (EDM). This refers to the fact that absent the transaction, the downstream firm would have paid a price for inputs that included a markup over the input suppliers’ marginal costs. The merged firm, by contrast, would have access to self-supplied inputs at cost. The Commentary cites EDM as the most common procompetitive effect claimed by merging parties, while noting that not all vertical mergers result in EDM. Specifically, EDM is not present when the merging firms use incompatible technologies or would not trade with each other for other reasons, or if the merged firm was able to self-supply all of its needed inputs to make downstream products prior to the merger.
Familiar split in Commissioner support for the FTC Commentary
As occurred with the issuance of the June 2020 Vertical Merger Guidelines, the Commission’s vote in favor of the publication of the FTC Commentary fell along party lines. Democratic Commissioners Rohit Chopra and Rebecca Slaughter issuing a dissenting statement arguing that the Commission needs to be more aggressive in its enforcement efforts with respect to vertical mergers. Reiterating their opposition to the updated Vertical Merger Guidelines, Chopra and Slaughter critique the Commentary’s focus on cases settled with behavioral remedies “particularly in light of the problematic market realities that have resulted.” They also stress the need to “turn the page on the era of lax oversight and to begin to investigate, analyze, and enforce the antitrust laws against vertical mergers with vigor.” In their concurring statement, Commissioners Noah Phillips and Christine Wilson counter that the Commission’s history of vertical enforcement “reflects evolving antitrust jurisprudence” and “the steady refinement of economic analysis.” 
With a Democratic majority at the Commission expected in the months following the inauguration of President-elect Biden, it remains to be seen whether the Commission’s vertical enforcement efforts will remain consistent with the agency’s approach to past vertical mergers. But notwithstanding the Commission’s split on the approach to be taken with respect to vertical mergers, the Commentary’s discussion of numerous past vertical merger challenges should provide useful guidance to merging parties and practitioners.
Authored by Edith Ramirez, Chuck Loughlin, Logan Breed.
 Federal Trade Commission press release, FTC Issues Commentary on Vertical Merger Enforcement (22 December 2020) available at https://www.ftc.gov/news-events/press-releases/2020/12/ftc-issues-commentary-vertical-merger-enforcement?utm_source=govdelivery.
 Federal Trade Commission, Commentary on Vertical Merger Enforcement (December 2020) at 2, available at https://www.ftc.gov/system/files/documents/reports/federal-trade-commissions-commentary-vertical-merger-enforcement/p180101verticalmergercommentary_0.pdf.
 U.S. Department of Justice and the Federal Trade Commission, Horizontal Merger Guidelines (19 August 2010), available at
 Commentary on Vertical Merger Enforcement at 6.
 Id. (citing Decision and Order, In the Matter of Sycamore Partners II, L.P., Staples, Inc. and Essendant, Inc., Dkt. No. C-4667 (Jan. 25, 2019)).
 DOJ and FTC Horizontal Merger Guidelines at 29-31.
 Commentary on Vertical Merger Enforcement at 33.
 Federal Trade Commission, Joint Dissenting Statement of Commissioners Rohit Chopra and Rebecca Kelly Slaughter (22 December 2020), available at https://www.ftc.gov/system/files/documents/public_statements/1585062/p181201chopraslaughtervmcdissent.pdf.
 Federal Trade Commission, Statement of commissioners Phillips and Wilson regarding the commentary on vertical merger enforcement (22 December 2020), available at https://www.ftc.gov/public-statements/2020/12/statement-commissioners-phillips-wilson-regarding-commentary-vertical.