Double Markups, Information, and Vertical Mergers

AuthorSimon Loertscher,Leslie M. Marx
Published date01 September 2022
Date01 September 2022
The Antitrust Bulletin
2022, Vol. 67(3) 434 –441
© The Author(s) 2022
Article reuse guidelines:
DOI: 10.1177/0003603X221103115
Double Markups, Information,
and Vertical Mergers
Simon Loertscher* and Leslie M. Marx**
In vertical contracting models with complete information and linear prices, double markups that arise
between independent firms provide an efficiency rationale for vertical mergers since these eliminate
double markups (EDM). However, the double markups vanish even without vertical integration if
the firms are allowed to use two-part tariffs. Hence, the efficiency rationale for vertical mergers in
models of complete information requires restrictions on the contracts that firms can use. In a sense,
with complete information, two-part tariffs are simply too powerful. If instead one allows incomplete
information and removes the restriction on contract forms, then vertical mergers continue to have
an effect that is analogous to EDM, but they also have the potential to affect the overall efficiency of
the market to the detriment of society. Consequently, the social surplus effects of vertical integration
depend on the underlying market structure, and vertical mergers are, in and of themselves, neither
good nor bad. We illustrate through an example that with incomplete information, the private benefits
from vertical integration tend to be excessive; that is, vertical mergers remain profitable even when
they are socially harmful.
vertical integration, double marginalization, antitrust, incomplete information Industrial organization
I. Introduction
Vertical integration has traditionally been viewed favorably by antitrust authorities because it is associ-
ated with socially beneficial synergies, in particular in the form of eliminating double markups (EDM).1
This favorable view is reflected in the 2020 Vertical Merger Guidelines.2 However, in part motivated
*Department of Economics, The University of Melbourne, Parkville, VIC, Australia
**Duke University, Durham, NC, USA
Corresponding Author:
Leslie M. Marx, Duke University, 100 Fuqua Drive, Durham, NC 27708, USA.
1103115ABXXXX10.1177/0003603X221103115The Antitrust BulletinLoertscher and Marx
1. See, e.g., Joseph J. Spengler, Vertical Integration and Antitrust Policy, 58 J. Polit. Econ. 347 (1950).
2. U.S. Department of Justice and Federal Trade Commission, Vertical Merger Guidelines (June 30, 2020), https://www.
cal_merger_guidelines_6-30-20.pdf (hereinafter 2020 Vertical Merger Guidelines). The 2020 Vertical Merger Guidelines
(at 2, 11) state that “vertical mergers often benefit consumers through the elimination of double marginalization, which
tends to lessen the risks of competitive harm.”

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