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16 - Mergers, Vertical and Conglomerate

Published online by Cambridge University Press:  12 November 2009

Keith N. Hylton
Affiliation:
Boston University
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Summary

This chapter examines the law governing nonhorizontal mergers. In particular, it traces the development and provides a critical overview of vertical and conglomerate merger doctrine. The key economic difference between horizontal and nonhorizontal mergers is that nonhorizontal mergers do not result in a reduction of competition. This suggests that the “welfare tradeoff” – that is, the tradeoff between deadweight costs due to reduced competition and efficiency gains due to cost reductions – will fall in favor of efficiency gains in the nonhorizontal merger context. Consistent with this intuition, the law has tended toward a rule of reason approach, though even in this case we observe a truncated test that limits the availability of some efficiency defenses.

VERTICAL MERGERS

The policy arguments about vertical mergers can be grouped into two categories: procompetitive theories and anticompetitive theories. I will review the arguments under these headings, and then trace the development of vertical merger doctrine.

Procompetitive Theories

The antitrust issues raised by vertical mergers are similar to those in exclusive dealing arrangements. This should not be surprising because a vertical merger is simply a type of exclusive dealing contract. The difference is that in the case of a merger, the contractual relationship is expected to last longer, and the “contract” is not as detailed. Indeed, in an influential article titled “The Nature of the Firm,” Ronald H. Coase argued that a firm “becomes larger as additional transactions (which could be exchange transactions coordinated though the price mechanism) are organized by the entrepreneur,” and that “a point must be reached where the costs of organizing an extra transaction within the firm are equal to the costs involved in carrying out the transaction in the open market.”

Type
Chapter
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Antitrust Law
Economic Theory and Common Law Evolution
, pp. 333 - 351
Publisher: Cambridge University Press
Print publication year: 2003

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