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36 Antitrust 42 (2021-2022)
Preserving Potential Entry Is Not the Holy Grail in Vertical Merger Enforcement

handle is hein.journals/antitruma36 and id is 130 raw text is: C O V E R S T O R I E S Preserving Potential Entry is Not the Holy Grail in Vertical Merger Enforcement BRIANNA L. ALDERMAN AND ROGER D. BLAIR N 2020, THE DEPARTMENT OF JUSTICE (DOJ) and the Federal Trade Commission (FTC) jointly issued the newest version of the Vertical Merger (VM) Guidelines.1 Before their release, the draft VM Guidelines received comments, criticism, and suggestions from 74 interested parties. The final version of the VM Guidelines were intended to inform the business and legal communities of how the DOJ and FTC evalu- ate proposed vertical mergers. No doubt, this guidance was welcome since it should have reduced uncertainty in ways that would facilitate decision making. In our view, there was much not to like about the VM Guidelines.2 After less than 15 months, however, the FTC rescinded the VM Guidelines and thereby created considerable uncertainty. Although the DOJ technically left the 2020 VM Guidelines in place, Assistant Attorney General Jonathan Kanter indicated that the DOJ would participate in revamping the Guidelines.3 Now, with the announcement that a new version of the Guidelines is forthcoming, there is an opportunity to correct some of the most serious misadventures that were present in the VM Guidelines. One such problem is a misplaced con- cern with protecting potential entry. Depending on the pre- merger market structure, horizontal mergers that eliminate a potential entrant may be problematic. But vertical mergers do not pose the same risks. Our concern is that procompet- itive vertical mergers may be blocked because the Agencies believe that vertical integration might chill entry. We will identify this misplaced concern in the 2020 VM Guidelines in the hopes that it is not duplicated in the forthcoming Professor Sara Bensley provided some much needed advice and research assistance, and we also thank Greg Wrobel for his editorial suggestions. We are grateful to the University of Florida's Ronald E. McNair Scholars Pro- gram, Social and Behavioral Sciences Graduate School Ph.D. Preparatory Program, and Department of Economics for financial support. The views expressed here are solely those of the authors. Brianna L. Alderman is a Ronald E. McNair Research Scholar, Depart- ment of Economics, University of Florida. Roger D. Blair is a Professor, Department of Economics, University of Florida, and affiliate faculty, Levin College of Law, University of Florida. revisions, and explore the consequences in more detail with our analysis of the Illumina-Grail matter.4 In our analy- sis, we will show that unwinding Illumina's acquisition of Grail's stock is apt to reduce consumer welfare. More gen- erally, we suggest that the Agencies should rely on sound economic analysis to avoid blocking vertical mergers that enhance consumer welfare.5 Preserving Potential Entry The importance of entry in disciplining the economic conduct of participants in a market has long been recognized.6 When competitively structured markets are in disequilibrium, entry helps restore order: quantity expands and price falls to mar- ginal and average cost. Excess profits disappear and social wel- fare is maximized. Consequently, it is clear that protecting the possibility of entry is sound antitrust policy and the Agencies should be applauded for doing so. In some markets, potential entry may also be worth preserving as the threat of actual entry leads the incumbents to temper their pursuit of profit.7 A simple numerical example will illustrate the economic benefits of entry. Suppose that demand is represented as: P = 140 - Q where P represents the price and Q represents the quantity, and the constant marginal and average cost of production is equal to $20. If the market were competitive, price would equal mar- ginal cost of $20 and output would be 120. In contrast, if the market is monopolized, the price will be $80 and the quantity will be 60 units.' The monopoly profit will be $3,600. These profits will attract entry. If the incumbent and the entrant behave as Cournot Duopolists,9 i.e., compete on quantity, the output will expand to 80 units and the price will fall to $60.10 Total profit in the market will fall to $3,200 and will be split between the two firms. These profits will attract further entry. As long as the firms continue to behave as Cournot oli- gopolists, industry output will be n~t times the compet- itive output, where n is the number of rivals in the market. Table 1 summarizes the results of further entry. As one can see, entry causes further reduction in the price and expan- sion in output. 4 2 - A N T I T R U S T

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