If a merger (or acquisition) makes headlines, it is most likely a horizontal merger. A horizontal merger is a merger between two firms that make the same product. Nonhorizontal mergers, while possibly a conglomerate merger, are usually vertical mergers. A vertical merger is a merger between two firms at different levels of the supply chain. This typically leads to vertical integration, where the firms, which do not directly compete, combine.
Since the merging firms do not compete, vertical merger enforcement is usually not as aggressive as that involving horizontal mergers. If two firms making the same product each have a large market share, then the merger (or acquisition) could lead to high horizontal concentration, which would allow the merged firm to monopolize the market. The Federal Trade Commission and the Antitrust Division of the United States Dept. of Justice (DOJ), which are responsible for merger enforcement in the United States, therefore carefully review horizontal mergers.
The first step of merger review is market definition. The enforcers of antitrust law must determine if the market participants are true rivals. To determine if the proposed merger will have harmful competitive effects the enforcers determine if the merger will give the merged firm market power, and thus be able to raise prices. The enforcers will determine if the merged firm could force customers to pay a 5% price rise. If customers would instead be able to buy other, comparable, products, then the transaction would not give the merging parties market power, and merger law would allow the merger.
Even if the merging firm had sufficient market power that it could raise prices by 5%, standard antitrust enforcement analysis may still allow the transaction. If the merger created efficiencies, such as lower operating costs, then, despite the increased market concentration, the Supreme Court has made clear in many cases, courts should allow these rival firms to merge.
Antitrust law applies this test to traditional markets, those for existing products. In fast moving high-technology and digital markets, however, the enforcement agencies increasingly must determine how the merger may affect markets for products the merging firms are still developing, products which do not exist yet. AAG Kanter, the head of DOJ’s Antitrust Division has, among others, repeatedly warned about the risk of firms achieving horizontal integration in a way which allows them to monopolize these Future Markets.
As in Europe, merger enforcement is therefore increasingly aggressively protecting competition in Future Markets or, as it is also called, competition to innovate. Illustrating this, the Federal Trade Commission and DOJ Antitrust Division have recently withdrawn what were their horizontal merger guidelines. These merger guidelines explained how the enforcers had traditionally applied market definition and similar concepts of antitrust law. But with their increased attention to Future Markets and other non-traditional markets, and their new, more aggressive approach to merger enforcement generally, the enforcers have said that they will instead issue new horizontal merger guidelines. These new guidelines will undoubtedly show, yet again, that antitrust law enforcement is as aggressive now as perhaps it has ever been.