This presentation by Carl SHAPIRO, Professor at the Haas School of Business and the Department of Economics at the University of California at Berkeley, 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 Merger Analysis:
Input Foreclosure in Practice
Professor Carl Shapiro
University of California at Berkeley
OECD Competition Committee
7 June 2019

2. Proposed Merger
Upstream
Input
Downstream
Product or
Service
Input Foreclosure: Elements of the Analysis
Alternative
Inputs?
Downstream
Rivals
RRC?
Diversion
EDM?
Final Consumers

3. AT&T/Time Warner
Merger
Turner
Content
DirecTV
Input Foreclosure: AT&T/Time Warner
Video Content:
Viacom,
Disney, Fox,
NBCUniversal
MVPDs:
Comcast,
Charter, DishDiversion
RRC?
EDM?
Pay TV Households

4. Input
Important?
No
Clear
Yes
Diversion
Significant?
No
Clear
Yes
Margins
Significant?
No
Clear
Ability and Incentive to Raise
Rivals’ Costs
Yes
Unilateral Ability and Incentive Analysis
Efficiencies?

5. Ability and Incentive: Three Steps
 Input Important?
 Loss of Sales by Downstream Rivals if Denied
Access to Input, Despite Their Best Response
 Diversion Significant?
 Share of Those Lost Sales Diverted to Downstream
Division of Merged Entity
 Margins Significant?
 Pre-Merger Price/Cost Margin at Downstream
Division of Merged Entity
Carl Shapiro Slide 4

6. Ability and Incentive: AT&T/Time Warner
 Turner Content Important?
 No Close Substitute; All MVPDs Distribute Turner
Content; Used Blackout Estimates
 Diversion to DirecTV Significant?
 Used Local MVPD Shares to Estimate Diversion,
Aggregated Nationally; Cord Cutting Not Directly
Relevant to Blackout Diversions
 DirectTV Margins Significant?
 Substantial Margins on Large Pay TV Package,
Hotly Disputed at Trial
 Estimated Price Increase for Turner Content
Carl Shapiro Slide 5

7. EDM
Sizeable?
Yes
Clear
Synergies
Significant?
No
Yes
No
Balancing Harms and Benefits
EDM >
RRC?
Yes
No
Block
Merger
Full
Balancing

8. Elimination of Double Marginalization
 EDM Presumed to Result from Merger
 Antitrust Economists Assume Merged Firm is
Operated to Maximize Profits
 EDM May Not be Merger Specific
 Can EDM Be Achieved by Contract? Look at Evidence
 EDM Leads to Cost Reduction at Downstream
Division of Merged Firm
 EDM Equals Gap Between Pre-Merger Price of
Input and Economic Cost of Input
 EDM is Small if Input is Widely Used by
Downstream Rivals – Careful!
Carl Shapiro Slide 7

9. EDM in AT&T/Time Warner Merger
 EDM Small Because Turner Content Widely
Used by MVPDs
 Reduction in Price at DirecTV Does Little to
Grow Turner Subscriber Base
 Most New DirecTV Subscribers Attracted by Lower
Prices Come from Other MVPDs
 Almost All Subscribers at Those MVPDs Already
Have Access to Turner Content
 EDM Was $1.20 Per Subscriber Per Month
 Far Less Than the Price Turner Charged for Content
 Opportunity Cost to Turner of a New DirecTV Sub
Carl Shapiro Slide 8

10. Comparing RRC and EDM
 Downstream Rivals Pay More for Input
 Add Up Total Extra Payments = Higher Costs
 Downstream Division of Merged Firm Has
Cost Reduction Due to EDM
 Compare RRC and EDM! Presto!
 OK, Not So Easy. Reception in Court?!
 Hard to Avoid Balancing if EDM is Credited
 Before We Even Get to Synergies
 Treat Synergy Claims as in Horizontal Mergers
 Very Hard to Do Full Balancing Quantitatively
Carl Shapiro Slide 9

11. Lessons and Pitfalls
 Screen for Vertical Mergers: Is the Input Hard
for Rivals to Do Without?
 Look at Diversion & Margins to Assess Input
Foreclosure Danger
 Impact on Final Consumers Depends on
Balancing of RRC and EDM
 Ask Whether EDM is Merger Specific
 EDM Small if Input Widely Used Downstream
 No Simple Route Based on Market Shares
 Apply Usual Standards to Synergy Claims
Carl Shapiro Slide 10