Chapter 10. Vertical Mergers

• Pages: 347-369

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CHAPTER 10

VERTICAL MERGERS

Certain mergers between firms participating in different but related

markets are termed “vertical mergers.” Historically, vertical merger

challenges have mostly involved firms at different levels of production or

distribution of a good or service,1 and vertical merger case law

accordingly tends to involve fact patterns in which there is a potential

customer-supplier relationship between the parties to the transaction at

issue. That relationship may involve two producers (one of which

supplies an input used in the production of the other’s product), a

producer and a distributor, or a combination of firms at different stages

of the distribution process.

The “vertical merger” moniker and analytical framework also have

been applied to a limited number of transactions in which the merging

firms supply products or services that are used by a single pool of

customers and potential customers. As discussed below, such

complementary-product mergers may present issues similar to those

presented by customer-supplier mergers.

Firms undertaking vertical mergers may happen to be direct

horizontal competitors in other markets, competing directly as alternative

suppliers of the same product or service. The competition issues arising

from the firms’ participation in markets that are adjacent to each other,

however, are the issues that give rise to the characterization of a merger

as vertical.2 By contrast, the “conglomerate” mergers discussed in the

1.See Brown Shoe Co. v. United States, 370 U.S. 294 (1962) (“Economic

arrangements between companies standing in a customer-supplier

relationship are characterized as ‘vertical’”).

2.See, e.g., Brown Shoe, 370 U.S. at 323 (horizontal in shoe manufacturing

and vertical in shoe retailing); HTI Health Servs. v. Quorum Health

Group, 960 F. Supp. 1104, 1112 (S.D. Miss. 1997) (horizontal in certain

physician services and managed care markets and vertical in the acute

inpatient hospital services market); Harnischfeger Corp. v. Paccar, Inc.,

474 F. Supp. 1151, 1158 (E.D. Wis.) (horizontal in mine excavating

loaders and vertical in hydraulic crane winches), aff’d mem., 624 F.2d

1103 (7th Cir. 1979). See generally James R. Loftis III, How to Analyze

Dual Distribution Problems, in 2 ANTITRUST COUNSELING AND

LITIGATION TECHNIQUES § 11.02[3] (Julian O. von Kalinowski ed.,

1992).

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next chapter involve firms that are neither direct competitors nor

competitors in adjacent markets.

When describing the firms involved in the customer-supplier type of

merger, the firm that provides inputs or operates at the earlier stage in the

production process is referred to as the “upstream” firm and the firm that

uses the input to make a product or is closer to the ultimate consumer is

called the “downstream” firm. A vertical merger may involve a

supplier’s integration “forward” toward the ultimate consumer, such as a

shoe manufacturer’s acquisition of a shoe retail chain3 or a Portland

cement producer’s acquisition of a ready-mix concrete company.4

Alternatively, the merger may involve a downstream firm’s integration

“backward” toward the supplier of an input, such as an automobile

manufacturer’s acquisition of a spark plug producer.5

In the complementary-product type of vertical merger, the two firms’

products are used in tandem, in either variable or fixed proportion. In

one example, the merging firms supplied electronic design automation

software used at different stages in the design of integrated circuits.

Although the products themselves were not substitutable, and neither

product was an input for the other, the firms’ software had to be

compatible so that customers could use the data output from one firm’s

software as data input for the other firm’s software.6

A. Historical Perceptions of Vertical Mergers

The antitrust treatment of vertical mergers tends to be fact specific,

with emphasis on whether a likelihood of harm to competition can be

demonstrated in the particular transaction at hand. Because the

analytical framework applied to vertical mergers has changed over time,

an understanding of the historical development of the legislative,

jurisprudential, and economic underpinnings of vertical merger law is

essential.

3.Brown Shoe, 370 U.S. at 323 (both parties were integrated manufacturers

and retailers, but Brown Shoe was primarily a manufacturer while Kinney

was primarily a retailer).

4.See Mississippi River Corp. v. FTC, 454 F.2d 1083 (8th Cir. 1972).

5.See Ford Motor Co. v. United States, 405 U.S. 562 (1972).

6.See Cadence Design Sys., 124 F.T.C. 131 (1997).