Double Markups, Information, and Vertical Mergers

• DOI: http://doi.org/10.1177/0003603X221103115
• Published date: 01 September 2022
• Date: 01 September 2022

https://doi.org/10.1177/0003603X221103115

The Antitrust Bulletin

2022, Vol. 67(3) 434 –441

© The Author(s) 2022

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DOI: 10.1177/0003603X221103115

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Article

Double Markups, Information,

and Vertical Mergers

Simon Loertscher* and Leslie M. Marx**

Abstract

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.

Keywords

vertical integration, double marginalization, antitrust, incomplete information Industrial organization

(IIIO)

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.

Email: marx@duke.edu

1103115ABXXXX10.1177/0003603X221103115The Antitrust BulletinLoertscher and Marx

research-article2022

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.

ftc.gov/system/files/documents/reports/us-department-justice-federal-trade-commission-vertical-merger-guidelines/verti-

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.”