This presentation by the OECD Secretariat was made during the discussion “Vertical mergers in the technology, media and telecom sector” held at the 131st meeting of the OECD Competition Committee on 7 June 2019. More papers and presentations on the topic can be found out at oe.cd/vmtm

1. Vertical Mergers in the Technology, Media and
Telecom Sector
1
Pedro Gonzaga (Pedro.Gonzaga@oecd.org)
OECD COMPETITION COMMITTEE

2. Vertical mergers… Are they a problem?
2
99% of the literature focuses
on the competitive risks
1% of the literature focuses
on efficiencies
(exceptions)
(general case)

3. What does the empirical literature say?
3
7
0
27
0 5 10 15 20 25 30
Undetermined
Negative
Positive or Neutral
Number of studies
Impact of vertical integration on consumer welfare
Source: Based on two surveys of the literature: Lafontaine and Slade (2007) and Global Antitrust Institute (2018).
• Some studies find evidence of harm to competitors (e.g. foreclosure)
• But evidence of consumer harm is more limited…

4. Enforcement generally reflects empirical
evidence
4
 Vertical mergers account for a small share of merger enforcement.
 Most decisions involve remedies, while prohibitions are rare.
Horizontal
87%
Vertical
8%
 Most authorities recognise that vertical
mergers are less problematic than
horizontal mergers.
Source: Based on 2017 data from 26 jurisdictions (Allen & Overy, 2018)

5. Why are vertical mergers less problematic than
horizontal mergers?
5
Price / quality
externalities
Production
efficiency
Net welfare
effect
Horizontal Merger
Horizontal
externalities (-)
Economies of
scale (+) ?
Vertical Mergers
Vertical
externalities (+)
Economies of
scope (+) +
Direct effects of a merger:
Vertical mergers can only harm competition indirectly
BUT HOW?

6. Vertical theories of harm
6
Elimination of potential
entrants
Elimination of entry
facilitators
Customer foreclosure
Raising rivals’ costs
Lowering rivals’
revenues
Evasion of regulation
Misuse of sensitive
information
Price discrimination
Information
exchanges
Increase of cost
symmetry
Input foreclosure
Weakening maverick
Elimination of disruptive buyer
Foreclosure threat
Improved
bargaining position
Unilateral incentive to
raise prices
Elimination of disruptive
seller

7. Main vertical theories of harm
(by type of asset)
7
Asset
FORECLOSURE
(unilateral effect)
COLLUSION
(coordinated effect)
Input Input foreclosure
Elimination of a disruptive
seller
Customer base Customer foreclosure
Elimination of a disruptive
buyer
Commercially sensitive
information
Misuse of commercially
sensitive information
Exchange of sensitive
information
Most theories of harm are variations of these general theories
Alternative theories are rarely investigated in practice.
 E.g. price discrimination (generally pro-competitive).

8. How to identify harmful vertical mergers?
8
Ability
Incentive
Effect
Requires control over an important and unique asset
Depends on diversion ratios and price margins
Harm (indirect) > Efficiencies (direct)

9. What is the best enforcement action?
9
• Remedies are often less restrictive than a prohibition decision.
• Although structural remedies are usually preferred, behavioural
remedies might be appropriate to address
vertical theories of harm.
Behavioural
remedies
62%
Full prohibition
17%
Abandoned
12%
Structural
remedies
9%
Source: Based on 68 vertical merger cases between 2015 and 2017 (ICN & CMA,
2018)

10. Why the focus on the TMT sector?
10
• Potentially greater ability:
– Big data, IPRs, platforms…
• Potentially greater incentive:
– Block entry, avoid regulation, counter bargaining power…
• But also greater scope for efficiencies:
– Economies of scope, quality externalities, hold-up problem…
It is crucial to look at the effects on consumers

11. Merger intervention in the TMT sector in 2017
11
Consumer &
Retail
16%
Industrial &
Manufacturing
29%
Financials
6%
Life Sciences
13% Others
20%
Technology
6%
Media
5%
Telecom
5%
TMT
16%
Share of merger intervention in the
TMT sector (16%)
Share of M&A activity in the TMT
sector (24%)<

12. Vertical Mergers in the Technology, Media and
Telecom Sector
12
Pedro Gonzaga (Pedro.Gonzaga@oecd.org)
OECD COMPETITION COMMITTEE