Vertical Mergers, The Coase Theorem, And The Burden of Proof

The challenge by the Department of Justice (DOJ) to AT&T’s acquisition of Time Warner, and a prior challenge by DOJ and Federal Communications Commission to Comcast’s acquisition of NBC-Universal, has increased attention on vertical mergers. The standard approach identifies a tactic that the merged firm would employ that is both profitable and harms consumers. This approach misses the target; a profitable but anticompetitive tactic may be necessary but is not sufficient. The “Coase theorem” implies that courts and enforcement agencies should instead focus on why vertical integration is necessary to achieve an outcome that would be profitable to the merging firms. The focus on the tactic rather than why ownership matters presumes that vertical merger is necessary, without supporting theory or evidence. The same proposition should hold for horizontal mergers, but the required strength of evidence is greater for vertical mergers because mergers between complement providers are first-order beneficial and the conduct facilitated by horizontal mergers but not vertical mergers is typically illegal.