Section 7 of the Clayton Act and the Analysis of “Semihorizontal” Mergers

• Author: Gregory J. Werden
• DOI: 10.1177/0003603X8202700105
• Published date: 01 March 1982
• Date: 01 March 1982
• Subject Matter: Article

The Antitrust Bulletin/Spring 1982

Section 7

of

the Clayton Act and the

analysis

of

"semihorizontal" mergers

BY GREGORY J. WERDEN·

135

Section 7 of the Clayton Act primarily has been used to attack

mergers involving direct competitors within a market. Such

mergers are called horizontal mergers. Under section 7, the

analysis

of

a horizontal merger consists of three steps: (1) the

boundaries of the relevant product and geographic markets are

delineated; (2) the market shares

of

the merging firms are calcu-

lated; and (3) the significance

of

these shares is considered in light

of industry structure and conduct and in light

of

judicial prece-

dent. This procedure comports reasonably well with the economic

theory and empirical evidencethat underlie the Clayton Act. The

purpose

of

this analysis is largely to determine whether the

merger would alter industry structure in a way that could sub-

stantially facilitate the formation or maintenance

of

noncompeti-

tive agreements concerning price or output, or that could signifi-

cantly increase the danger of a single firm being able to control

price or output.

On the other hand, there is no established procedure for

applying the Clayton Act to mergers involving firms that produce

imperfect substitutes-products that are not in the same market

but that nevertheless compete. Such mergers can be called "semi-

horizontal" mergers. They cannot be dealt with adequately using

horizontal merger tools or those developed for the analysis

of

Economist, Antitrust Division, U.S. Department of Justice.

©1982by Federal Legal Publications, Inc.

136 : The antitrust bulletin

other recognized types of mergers-vertical and conglomerate.

Market shares simply

don't

mean the same thing as they do in the

horizontal context. Semihorizontal mergers cannot promote tacit

or explicit collusion in the way a horizontal merger can. Such

mergers do not affect shares in any relevant market and, there-

fore, cannot create or enhance market power. However, as is

shown below, they can alter the extent to which a firm would

choose to exercise any market power it might have; so it should

be possible to attack such mergers under Clayton 7. But the

conventional lines of attack on vertical and conglomerate mergers

cannot be used to deal with this situation.

When limited to treating a merger as horizontal, vertical or

conglomerate, mergers of the semihorizontal type must be either

treated as horizontal or conglomerate, although neither treatment

would properly analyze their competitive impact. With only these

choices, a court's decision is likely to turn on whether the

competition between the merging firms' products is totally ig-

nored or is so exaggerated that products that are not good

substitutes are considered to be in the same market. This ap-

parent dilemma erroneously has been considered to be a market

definition problem. IWhile it may be difficult to determine

whether a merger is horizontal or semihorizontal, the failure of

existing law is in not recognizing that there is a fourth category of

mergers.' The inadequacy of existing tools is seen in a review of

ISee, e.g., P.

AREEDA

&D.

TURNER,

2

ANTITRUST

LAW

385-88

(1978); F.

SCHERER,

INDUSTRIAL

MARKET

STRUCTURE

AND

ECONOMIC

PER.

FORMANCE

552-54 (2d ed. 1980); E.

SINGER,

ANTITRUST

ECONOMICS

246-52

(1968).

2The authors who most clearly recognize

that

there is this special

type of merger class them as conglomerate 'mergers. P. Areeda &D.

Turner, Conglomerate Mergers: Extended Interdependence and Effects

of

Interindustry Competition as Grounds

for

Condemnation, 127 U.

PA. L.

REV.

1082 (1979). While this classification cannot be said to be

wrong, it probably is unfortunate and could result in insufficient

attention being paid to this type

of

merger. Calling semihorizontal

mergers "conglomerate" may tend to obscure their potential effects on