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Competitive Harm from Vertical Mergers


The antitrust enforcement Agencies’ 2020 Vertical Merger Guidelines (VMGs) introduce a nontechnical application of bargaining theory into the competitive assessment of vertical acquisitions. This bargaining theory has much in common with the theory of unilateral effects that is applied to horizontal mergers. The VMGs focus on post-merger price increases requires consideration of a vertical merger’s role in eliminating double marginalization (EDM). The problem occurs when two bargaining firms both have market power but are unable to coordinate their output. Assessing EDM bundles two themes that Ronald Coase developed in his two most well-known articles: “The Nature of the Firm” and “The Problem of Social Cost”. The first argued that the boundaries of a firm are determined by the firm’s continuous search to minimize costs. The second argued that two traders in a well-functioning market will achieve the joint-maximizing solution. Anti-interventionists rely heavily on Coasean arguments that unless high transaction costs get in the way firms will bargain to joint maximizing results. If that is true, then double marginalization will rarely provide a defense to a vertical merger. The law of vertical mergers deals largely with firms that transact with one another routinely, in legally enforceable buy-sell relationships. In a well-functioning vertical market durable double marginalization should be rare.

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  1. U.S. Dept. of Justice and Federal Trade Commission, Vertical Merger Guidelines (VMG) (June 30, 2020), available at

  2. Original §7 applied to acquisitions “… where the effect of such acquisition may be to substantially lessen competition between the corporation whose stock is so acquired and the corporation making the acquisition….”.

  3. E.g., U.S. v. El Paso Natural Gas Co., 376 U.S. 651 (1964).

  4. Brown Shoe Co. v. United States, 370 U.S. 294 (1962); United States v. Columbia Steel Co., 334 U.S. 495 (1948).

  5. See Columbia Steel, 334 U.S. at 507, n. 7 (action was not brought under Clayton Act because it was an asset rather than a stock acquisition).

  6. Standard Oil v. United States, 337 U.S. 293 (1949). See Id. at 297, 300–301.

  7. Id. at 314.

  8. Brown Shoe, 370 U.S. at 318 n. 32, citing H.R.Rep. No. 1191, 81st Cong., 1st Sess. 8 (‘Acquisitions of stock or assets have a cumulative effect’); S.Rep. No. 1775, 81st Cong., 2d Sess. 4–5, U.S.Code Cong. and Adm.News, 1950, p. 4296 (‘The intent here * * * is to cope with monopolistic tendencies in their incipiency and well before they have attained such effects as would justify a Sherman Act proceeding.’).

  9. Brown Shoe v. United States, 370 U.S. 294, 315–316 (1962).

  10. Brown Shoe. supra, discussing FTC, The Present Trend of Corporate Mergers and Acquisitions (1947), reprinted in Hearings on H.R. 515 at 300–317 (1950).

  11. Brown Shoe, id. at 316.

  12. Id. at 317–318 & n. 32.

  13. See Jesse W. Markham, The Federal Trade Commission’s Use of Economics, 64 Col. L. Rev. 405, 412–413 (1964). Markham was an economics professor at both Princeton and Harvard Business School, as well as chief economist for the FTC.

  14. Derek C. Bok, Sect. 7 of the Clayton Act and the Merging of law and Economics, 74 Harv. L. Rev. 226 (1960). Bok later became President of Harvard University.

  15. Id. at 236–237. See Herbert Hovenkamp, Derek Bok and the Merger of Law and Economics, 21 J. L. Reform 515 (1988).

  16. E.g., Brown Shoe, supra; United States v. Von’s Grocery Co., 384 U.S. 270 (1966); FTC v. Procter & Gamble Co., 386 U.S. 568 (1967).

  17. E.g., In re Foremost Dairies, Inc., 60 F.T.C. 944, 1084 (1962), modified, 67 F.T.C. 282 (1965) (condemning a merger because its efficiencies would give the firm a “decisive advantage” over competitors).

  18. See Robert H. Bork, The Antitrust Paradox: A Policy at War With Itself, Chs. 9 & 10 (1978); 4 & 5 Phillip Areeda & Donald Turner, Antitrust Law, Ch. 9 (1980).

  19. Bork, id. at Chs. 11, 14–15.

  20. Department of Justice, 1984 Merger Guidelines §4.2, available at

  21. VMG, §3.

  22. See 4 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law 913–914 (4th ed. 2017).

  23. See Brown Shoe v. United States, 370 U.S. 294, 324 (1963) (interpreting Clayton Act’s “section of the country” and “line of commerce” language as requiring, respectively, a geographic market and a product market); and see Herbert Hovenkamp, Federal Antitrust Policy: the Law of Competition and its Practice §3.1 (6th ed. 2020).

  24. Ohio v. American Express Co., 138 S. Ct. 2274, 2285 n.7 (2018).

  25. On the Supreme Court’s tendency to turn factual questions of economics into questions of law, see Herbert Hovenkamp, The Looming Crisis in Antitrust Economics, Boston Univ. L. Rev. (2021) (forthcoming), available at

  26. VMG, §4.a.

  27. The theory of RRC dates back to seminal work done in the 1980s. See Steven C. Salop and David T. Scheffman, Raising Rivals’ Costs, 73 Am. Econ. Rev. 267 (1983); and Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals’ Costs to achieve Power Over Price, 96 Yale L.J. 209 (1986).

  28. Fruehauf Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979).

  29. See, e.g., Richard A. Posner, Antitrust Law 196 (2d ed. 2001) (RRC is “not a happy formula”). See Herbert Hovenkamp, Exclusion and the Sherman Act, 72 Univ. Chi. L. Rev. 147, 159 (2005).

  30. United States v. American Can Co., 230 F. 859 (D.Md. 1916), app. dism’d, 256 U.S. 706 (1921).

  31. John Nash, The Bargaining Problem, 18 Econometrica 155 (1950); Ariel Rubinstein, Perfect Equilibrium in a Bargaining Model, 50 Econometrica 97 (1982). For general discussions, see Martin Osborne and Ariel Rubinstein, Bargaining and Markets (1990); Abhinay Muthoo, Bargaining Theory with Applications (1999).

  32. See, e.g., Gregory J. Werden and Luke M. Froeb, Unilateral Competitive Effects of Horizontal Mergers, in Advances in the Economics of Competition Law (Paolo Buccirossi, ed., MIT Press 2005); Steven W. Salant, Sheldon Switzer & Robert J. Reynolds, Losses from Horizontal Merger: the Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium, 98 Q.J. Econ. 185 (1983).

  33. See, e.g., Virnetx, Inc. v. Cisco Sys., Inc., 767 F.3d 1308 (Fed. Cir. 2015) (evidence based on Nash bargaining model inadmissible to show patent infringement damages).

  34. United States v. AT&T, Inc., 916 F.3d 1029 (D.C.Cir. 2019). See Hovenkamp, Federal Antitrust Policy, §9.5.

  35. See In re High Fructose Corn Syrup Antitrust Litigation (HFCS), 295 F.3d 651, 665 (7th Cir.2002), cert. denied, 537 U.S. 1188 (2003) (creating a procedure for selecting a neutral expert in a situation involving a dispute between warring regression models).

  36. See Roger D. Blair, David L. Kaserman, and Richard E. Romano, A Pedagogical Treatment of Bilateral Monopoly, 55 S. Econ. J. 831 (1989).

  37. Po-Hsuan Lin, et al., General Economic Principles of Bargaining and Trade: Evidence from 2000 Classroom Experiments, Nature (Human Behavior) (Aug. 2020), available at

  38. Ibid.

  39. See, e.g., Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87 (1989).

  40. On this point, see Herbert Hovenkamp, Arrow’s Theorem: Ordinalism and Republican Government, 75 Iowa L. Rev. 949, 970 (1990); Herbert Hovenkamp, Bargaining in Coasian Markets: Servitudes and Alternative Land Use Controls, 27 J. Corp. L. 519, 524–526 (2002).

  41. Sturges v. Bridgman, (1879) 11 Ch.D. 852, (1883), 32 Reports of Cases Decided by the English Courts 837. See Ronald H. Coase, The Problem of Social Cost, 3 J. L. & Econ. 1, 8–9 (1960).

  42. Ronald H. Coase, The Firm the Market and the Law 162 (1988). See also Ronald H. Coase, The Coase Theorem and the Empty Core: A Comment, 24 J.L. & Econ. 183, 184 (1981) (responding to critique that under Coase theorem there would be no equilibrium by illustrating repeated rounds of bargaining converging on even division of the surplus). See Varouj A. Aivazian & Jeffrey L. Callen, The Coase Theorem and the Empty Core, 24 J.L. & Econ. 175 (1981). For a good discussion, see Maxwell L. Stearns, The Misguided Renaissance of Social Choice, 103 Yale L.J. 1219 (1994).

  43. Steven C. Salop, Invigorating Vertical Merger Enforcement, 127 Yale L.J. 1962 (2018); Serge Moresi & Steven C. Salop, VGuppi: Scoring Unilateral Pricing Incentives in Vertical Mergers, 79 Antitrust L.J. 185 (2013).

  44. See 2A Phillip E. Areeda, Herbert Hovenkamp, Roger d. Blair & Christine Piette Durrance 392, 395b, 397f (5th ed. 2021).

  45. 15 U.S.C. §26.

  46. VMG, §6.

  47. See 4A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law 970f (4th ed. 2016).

  48. E.g., United States v. Black & Decker Mfg. Co., 430 F. Supp. 729, 748–749 n.38 (D. Md. 1976) (rejecting HHI); Marathon Oil Co. v. Mobil Corp., 530 F. Supp. 315, 323 n.15 (N.D. Ohio 1981), aff'd, 669 F.2d 378 (6th Cir. 1981), cert. denied, 455 U.S. 982 (1982) (HHI okay as alternative to CR4).

  49. See 4 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law 930–932 (4th ed. 2016).

  50. United States v. AT&T, 310 F. Supp. 3d 161, 222–223 (D.D.C. 2018), aff'd, 916 F.3d 1029 (D.C. Cir. 2019).

  51. VMG, §4.a, Example 2.

  52. Fruehauf Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979).

  53. See,U.S.%20market%20essentially%20since%202003.

  54. VMG, §2.

  55. United States v. AT&T, 310 F. Supp. 3d 161, 222–223 (D.D.C. 2018), aff'd, 916 F.3d 1029 (D.C. Cir. 2019).

  56. Fruehauf Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979).

  57. Ibid.

  58. Id. at 349.

  59. See Oliver E. Williamson, Economies as an Antitrust Defense: The Welfare Trade-Offs, 58 AMER. ECON. REV. 18 (1968).

  60. Allis-Chalmers Mfg. Co. v. White Consol. Indus., 414 F.2d 506, 515–518 (3d Cir. 1969).

  61. Cf. the “portfolio effects” or “range effects” theory that has had some use in the EU but not the U.S., to condemn a vertical or conglomerate merger if the ability of the post-merger firm to develop or sell the two products together threatened to drive unintegrated rivals out of business. The EU relied on the theory in 2005 to block the merger of General Electric Co. and Honeywell, Inc. See Case No. COMP/M 2220, General Electric/Honeywell, available at See Eric S. Hochstadt, The Brown Shoe of European Union Competition Law, 24 Cardozo L. Rev. 287 (2002); William J. Kolasky, Conglomerate Mergers and Range Effects: It’s a Long Way from Chicago to Brussels, 10 GMU L. Rev. 533 (2002).

  62. VMG, §6.

  63. Ronald H. Coase, The Nature of the Firm, 4 Economica (n.s.) 386, 392 (1937) (“… the operation of a market costs something and by forming an organisation and allowing some authority (an " entrepreneur ") to direct the resources, certain marketing costs are saved.”).

  64. See Hovenkamp, Federal Antitrust Policy, §9.2.

  65. See 15 U.S.C. §13c (making it unlawful to give a price discount in lieu of brokerage unless the buyer actually performed the brokerage services in question). See FTC v. Henry Broch & Co., 363 U.S. 166 (1960); and 13 Herbert Hovenkamp, Antitrust Law 2362 (4th ed. 2019).

  66. VMG, §6.

  67. Benjamin Klein, Robert G. Crawford & Armen A. Alchian, Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & Econ. 297 (1978).

  68. Ronald H. Coase, The Acquisition of Fisher Body by General Motors, 43 J. L. & Econ. 15 (2000); Ronald H. Coase, The Conduct of Economics: The Example of Fisher Body and General Motors, 15 J. Econ. Man. 255 (2006).

  69. See Benjamin Klein, Fisher-General Motors and the Nature of the Firm, 43 J. L. & Econ. 105 (2000); Ramon Casadesus-Masanell & Daniel Spulber, The Fable of Fisher Body, 43 J. L. & Econ. 67 (2000); Robert F. Freeland, Creating Holdup Through Vertical Integration: Fisher Body Revisited, 43 J.L. & Econ. 33 (2000). See also Douglas G. Baird, In Coase’s Footsteps, 70 Univ. Chi. L. Rev. 23 (2003); Yoshiro Miwa & J. Mark Ramseyer, Rethinking Relationship-Specific Investments: Subcontracting in the Japanese Automobile Industry, 98 Mich. L. Rev. 2636 (2000); Susan Helper, John Paul MacDuffie, and Charles Sabel, Pragmatic collaborations: Advancing Knowledge While Controlling Opportunism, 9 Industrial & Corp. Change 443 (2000).

  70. Ronald H. Coase, The Problem of Social Cost, 3 J.L. & Econ. 1 (1960).

  71. For a good statement of the positions, see Calabresi & Melamed, supra.

  72. Id. at 2–3, discussing Sturges v. Bridgeman, (1879) LR 11 Ch D 852.

  73. Id. at 25, discussing Delta Air Corp. v. Kersey, 193 Ga. 862, 20 S.E.2d 245 (1942).

  74. Coase, Social Cost, passim.

  75. Id. at 11, discussing Bryant v. Lefever, 4 C.P.D. 172 (1878–1879).

  76. Id. at 8, discussing Fontainebleu Hotel Corp. v. Forty-Five Twenty-Five, Inc., 114 So.2d 357 (1959).

  77. E.g., Joseph J. Spengler, Vertical Integration and Antitrust Policy, 58 J. Pol. Econ. 347 (1950). See also Fritz Machlup & Martha Taber, Bilateral Monopoly, Successive Monopoly, and Vertical Integration, 27 Economica 101 (1960) (discussing scholarship to that time).

  78. Augustin Cournot, Researches Into the Mathematical Principles of the Theory of Wealth 99–116 (Nathaniel T. Bacon trans., Augustus M. Kelley Publishers 1971) (1838).

  79. Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 Tex. L. Rev. 1991 (2007); Josh Lerner & Jean Tirole, Efficient Patent Pools, 94 Am. Econ. Rev. 691 (2004).

  80. See Erik Hovenkamp, Competition, Inalienability, and the Economic Analysis of Patent Law, 21 Stan. Tech. L. Rev. 33 (2018).

  81. See Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (overruling per se rule against resale price maintenance); State Oil Co. v. Khan, 522 U.S. 3 (1997) (overruling per se rule against maximum resale price maintenance).

  82. VGM, §6.


Thanks to Roger D. Blair for comments.

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Hovenkamp, H. Competitive Harm from Vertical Mergers. Rev Ind Organ 59, 139–160 (2021).

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  • Vertical mergers
  • Nash bargaining
  • Coase
  • Foreclosure