#387 Can Potential Vertical Integration Harm Be (Silver) Screened Horizontally?

So vertical merger review has a very well-accepted theoretical framework by looking at basically what the merged firm would have-- whether, uh, that merged firm would have the ability and incentive to foreclose rivals.

But agencies, uh, the, the competition enforcement, at least in the United States, keep losing in court and, and, uh, the empirical foundation keeps coming up short, um, in court.

Just looking at the DOJ's AT&T and Time Warner case and FTC's Illumina/Grail case, the framework seems to be clear in theory, but, uh, a little bit hard to satisfy in reality.

Charles, you have a paper with Shilong that is supposed to change and, and at least give us a little bit better clarity on how the robust theoretical, uh, framework is going to be applied in reality and, uh, how what is usually hard to satisfy is actually going to be, uh, a little bit more, uh, clear.

Would you tell us how your paper is going to do that?

Yeah, of course.

Uh, you know, as you said, there's a, there's a theoretical framework when we're thinking about the harms from vertical integration, which basically is a trade-off between deficiency gains coming from double marginalization and, uh, foreclosure, right? So the ability of a firm to control one layer of the supply chain, uh, and disadvantage rivals in another layer of the supply chain.

Uh, competition authorities typically use this idea of ability and incentive to address the risk of foreclosure, to assess the risk of foreclosure, where a firm might have the ability to foreclose rivals if it controls a bottleneck segment, but they only have the incentive to foreclose rivals if, uh, they can actually divert consumers, right, for example, in the downstream segment.

And so the potential for vertical integration to cause consumer harm depends on, uh, basically the horizontal competition in the upstream and downstream segments.

And in our paper, we look at a particularly clean setting where we have empirical variation in that horizontal market structure across different markets.

We can ask, can we actually measure how that horizontal market structure affects the potential for harm from vertical integration?

That is very helpful.

Shilong, let's get to you, and obviously, we're going to talk about your paper with Charles a little bit more, uh, later on.

So vertical merger review has a very well-accepted theoretical framework by looking at basically what the merged firm would have-- whether, uh, that merged firm would have the ability and incentive to foreclose rivals.

But agencies, uh, the, the competition enforcement, at least in the United States, keep losing in court and, and, uh, the empirical foundation keeps coming up short, um, in court.

Just looking at the DOJ's AT&T and Time Warner case and FTC's Illumina/Grail case, the framework seems to be clear in theory, but, uh, a little bit hard to satisfy in reality.

Charles, you have a paper with Shilong that is supposed to change and, and at least give us a little bit better clarity on how the robust theoretical, uh, framework is going to be applied in reality and, uh, how what is usually hard to satisfy is actually going to be, uh, a little bit more, uh, clear.

Would you tell us how your paper is going to do that?

Yeah, of course.

Uh, you know, as you said, there's a, there's a theoretical framework when we're thinking about the harms from vertical integration, which basically is a trade-off between deficiency gains coming from double marginalization and, uh, foreclosure, right? So the ability of a firm to control one layer of the supply chain, uh, and disadvantage rivals in another layer of the supply chain.

Uh, competition authorities typically use this idea of ability and incentive to address the risk of foreclosure, to assess the risk of foreclosure, where a firm might have the ability to foreclose rivals if it controls a bottleneck segment, but they only have the incentive to foreclose rivals if, uh, they can actually divert consumers, right, for example, in the downstream segment.

And so the potential for vertical integration to cause consumer harm depends on, uh, basically the horizontal competition in the upstream and downstream segments.

And in our paper, we look at a particularly clean setting where we have empirical variation in that horizontal market structure across different markets.

We can ask, can we actually measure how that horizontal market structure affects the potential for harm from vertical integration?

That is very helpful.

Shilong, let's get to you, and obviously, we're going to talk about your paper with Charles a little bit more, uh, later on.