1984 Non-Horizontal Merger Guidelines

Withdrawn January 2020
Non-Horizontal Merger Guidelines
(Originally issued as part of “U.S. Department of Justice Merger Guidelines, June 14,
1984.” For horizontal mergers see the “U.S. Department of Justice and the Federal Trade
Commission Horizontal Merger Guidelines” issued April 2, 1992 and revised April 8, 1997.)
4. HORIZONTAL EFFECT FROM NON-HORIZONTAL
MERGERS
4.0 By definition, non-horizontal mergers involve firms that do not
operate in the same market. It necessarily follows that such mergers pro-
duce no immediate change in the level of concentration in any relevant
market as defined in Section 2 of these Guidelines. Although non-
horizontal mergers are less likely than horizontal mergers to create com-
petitive problems, they are not invariably innocuous. This section
describes the principal theories under which the Department is likely to
challenge non-horizontal mergers.
4.1 Elimination of Specific Potential Entrants
4.11 The Theory of Potential Competition
In some circumstances, the non-horizontal merger
25
of a firm already in
a market (the “acquired firm”) with a potential entrant to that market
(the “acquiring firm”)
26
may adversely affect competition in the market.
If the merger effectively removes the acquiring firm from the edge of the
market, it could have either of the following effects.
4.111 Harm to “Perceived Potential Competition”
By eliminating a significant present competitive threat that constrains
the behavior of the firms already in the market, the merger could result in
an immediate deterioration in market performance. The economic theory
of limit pricing suggests that monopolists and groups of colluding firms
may find it profitable to restrain their pricing in order to deter new entry
that is likely to push prices even lower by adding capacity to the market. If
the acquiring firm had unique advantages in entering the market, the firms
25
Under traditional usage, such a merger could be characterized as either “vertical” or
“conglomerate,” but the label adds nothing to the analysis.
26
The terms “acquired and “acquiring” refer to the relationship of the firms to the
market of interest, not to the way the particular transaction is formally structured.
23

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in the market might be able to set a new and higher price after the threat of
entry by the acquiring firm was eliminated by the merger.
4.112 Harm to “Actual Potential Competition”
By eliminating the possibility of entry by the acquiring firm in a more
procompetitive manner, the merger could result in a lost opportunity for
improvement in market performance resulting form the addition of a
significant competitor. The more procompetitive alternatives include both
new entry and entry through a “toehold” acquisition of a present small
competitor.
4.12 Relation Between Perceived and Actual Potential
Competition
If it were always profit-maximizing for incumbent firms to set price in
such a way that all entry was deterred and if information and coordination
were sufficient to implement this strategy, harm to perceived potential
competition would be the only competitive problem to address. In prac-
tice, however, actual potential competition has independent importance.
Firms already in the market may not find it optimal to set price low
enough to deter all entry; moreover, those firms may misjudge the entry
advantages of a particular firm and, therefore, the price necessary to deter
its entry.
27
4.13 Enforcement Standards
Because of the close relationship between perceived potential competi-
tion and actual potential competition, the Department will evaluate
mergers that raise either type of potential competition concern under a
single structural analysis analogous to that applied to horizontal mergers.
The Department first will consider a set of objective factors designed to
identify cases in which harmful effects are plausible. In such cases, the
Department then will conduct a more focused inquiry to determine
whether the likelihood and magnitude of the possible harm justify a
challenge to the merger. In this context, the Department will consider any
specific evidence presented by the merging parties to show that the in-
ferences of competitive harm drawn from the objective factors are
unreliable.
The factors that the Department will consider are as follows.
27
When collusion is only tacit, the problem of arriving at and enforcing the correct limit
price is likely to be particularly difficult.
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4.131 Market Concentration
Barriers to entry are unlikely to affect market performance if the struc-
ture of the market is otherwise not conducive to monopolization of collu-
sion. Adverse competitive effects are likely only if overall concentration,
or the largest firm’s market share, is high. The Department is unlikely to
challenge a potential competition merger unless overall concentration of
the acquired firm’s market is above 1800 HHI (a somewhat lower concen-
tration will suffice if one or more of the factors discussed in Section 3.4 in-
dicate that effective collusion in the market is particularly likely). Other
things being equal, the Department is increasingly likely to challenge a
merger as this threshold is exceeded.
4.132 Conditions of Entry Generally
If entry to the market is generally easy, the fact that entry is marginally
easier for one or more firms is unlikely to affect the behavior of the firms
in the market. The Department is unlikely to challenge a potential com-
petition merger when new entry into the acquiring firm’s market can be ac-
complished by firms without any specific entry advantages under the con-
ditions stated in Section 3.3. Other things being equal, the Department is
increasingly likely to challenge a merger as the difficulty of entry increase
above that threshold.
4.133 The Acquiring Firm’s Entry Advantage
If more than a few firms have the same or a comparable advantage in
entering the acquired firm’s market, the elimination of one firm is unlikely
to have any adverse competitive effect. The other similarly situated firm or
firms would continue to exert a present restraining influence, or, if entry
would be profitable, would recognize the opportunity and enter. The
Department is unlikely to challenge a potential competition merger if the
entry advantage ascribed to the acquiring firm (or another advantage of
comparable importance) is also possessed by three or more other firms.
Other things being equal, the Department is increasingly likely to
challenge a merger as the number of other similarily situated firms
decreases below three and as the extent of the entry advantage over non-
advantaged firms increases.
If the evidence of likely actual entry by the acquiring firm is particularly
strong,
28
however, the Department may challenge a potential competition
merger, notwithstanding the presence of three of more firms that are ob-
jectively similarly situated. In such cases, the Department will determine
28
For example, the firm already may have moved beyond the stage of consideration and
have made significant investments demonstrating an actual decision to enter.
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Withdrawn January 2020
the likely scale of entry, using either the firm’s own documents or the
minimum efficient scale in the industry. The Department will then
evaluate the merger much as it would a horizontal merger between a firm
the size of the likely scale of entry and the acquired firm.
4.134 The Market Share of the Acquired Firm
Entry through the acquisition of a relatively small firm in the market
may have a competitive effect comparable to new entry. Small firms fre-
quently play peripheral roles in collusive interactions, and the particular
advantages of the acquiring firm may convert a fringe firm into a signifi-
cant factor in the market.
29
The Department is unlikely to challenge a
potential competition merger when the acquired firm has a market share
of five percent or less. Other things being equal, the Department is increas-
ingly likely to challenge a merger as the market share of the acquired firm
increases above the threshold. The Department is likely to challenge any
merger satisfying the other conditions in which the acquired firm has a
market share of 20 percent of more.
4.135 Efficiences
As in the case of horizontal mergers, the Department will consider ex-
pected efficiencies in determining whether to challenge a potential com-
petition merger. See Section 3.5 (Efficiencies).
4.2 Competitive Problems from Vertical Mergers
4.21 Barriers to Entry from Vertical Mergers
In certain circumstances, the vertical integration resulting from vertical
mergers could create competitively objectionable barriers to entry. Stated
generally, three conditions are necessary (but not sufficient) for this prob-
lem to exist. First, the degree of vertical integration between the two
markets must be so extensive that entrants to one market (the “primary
market”) also would have to enter the other market (the “secondary
market”)
30
simultaneously. Second, the requirement of entry at the secon-
dary level must make entry at the primary level significantly more difficult
29
Although a similar effect is possible with the acquisition of larger firms, there is an in-
creased danger that the acquiring firm will choose to acquiesce in monopolization or collusion
because of the enhanced profits that would result from its own disappearance from the edge of the
market.
30
This competitive problem could result from either upstream or downstream integration,
and could affect competition in either the upstream market or the downstream market. In the
text, the term “primary market” refers to the market in which the competitive concerns are
being considered, and the term “secondary market” refers to the adjacent market.
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and less likely to occur. Finally, the structure and other characteristics of
the primary market must be otherwise so conducive to noncompetitive
performance that the increased difficulty of entry is likely to affect its per-
formance. The following standards state the criteria by which the Depart-
ment will determine whether these conditions are satisfied.
4.211 Need for Two-Level Entry
If there is sufficient unintegrated capacity
31
in the secondary market,
new entrants to the primary market would not have to enter both markets
simultaneously. The Department is unlikely to challenge a merger on this
ground where post-merger sales (or purchases) by unintegrated firms in
the secondary market would be sufficient to service two minimum-
efficient-scale plants in the primary market. When the other conditions are
satisfied, the Department is increasingly likely to challenge a merger as the
unintegrated capacity declines below this level.
4.212 Increased Difficulty of Simultaneous Entry of
Both Markets
The relevant question is whether the need for simultaneous entry to the
secondary market gives rise to a substantial incremental difficulty as com-
pared to entry into the primary market alone. If entry at the secondary
level is easy in absolute terms, the requirement of simultaneous entry to
that market is unlikely adversely to affect entry to the primary market.
Whatever the difficulties of entry into the primary market may be, the
Department is unlikely to challenge a merger on this ground if new entry
into the secondary market can be accomplished under the conditions
stated in Section 3.3.
32
When entry is not possible under those conditions,
the Department is increasingly concerned about vertical mergers as the dif-
ficulty of entering the secondary market increases. The Department,
however, will invoke this theory only where the need for secondary market
entry significantly increases the costs (which may take the form of risks) of
primary market entry.
More capital is necessary to enter two markets than to enter one. Stand-
31
Ownership integration does not necessarily mandate two-level entry by new entrants to
the primary market. Such entry is most likely to be necessary where the primary and secon-
dary markets are completely integrated by ownership and each firm in the primary market
uses all of the capacity of its associated firm in the secondary market. In many cases of
ownership integration, however, the functional fit between vertically integrated firms is not
perfect, and an outside market exists for the sales (purchases) of the firms in the secondary
market. If that market is sufficiently large and diverse, new entrants to the primary market
may be able to participate without simultaneous entry to the secondary market. In consider-
ing the adequacy of this alternative, the Department will consider the likelihood of predatory
price or supply “squeezes” by the integrated firms against their unintegrated rivals.
32
Entry into the secondary market may be greatly facilitated in that an assured supplier
(customer) is provided by the primary market entry.
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Withdrawn January 2020
ing alone, however, this additional capital requirement does not constitute
a barrier to entry to the primary market. If the necessary finds were
available at a cost commensurate with the level of risk in the secondary
market, there would be no adverse effect. In some cases, however, lenders
may doubt that would-be entrants to the primary market have the
necessary skills and knowledge to succeed in the secondary market and,
therefore, in the primary market. In order to compensate for this risk of
failure, lenders might charge a higher rate for the necessary capital. This
problem becomes increasingly significant as a higher percentage of the
capital assets in the secondary market are long-lived and specialized to that
market and, therefore, difficult to recover in the event of failure. In
evaluating the likelihood of increased barriers to entry resulting from in-
creased cost of capital, therefore, the Department will consider both the
degree of similarity in the essential skills in the primary and secondary
markets and the economic life and degree of specialization of the capital
assets in the secondary market.
Economies of sale in the secondary market may constitute an addi-
tional barrier to entry to the primary market in some situations requiring
two-level entry. The problem could arise if the capacities of minimum-
efficient-scale plants in the primary and secondary markets differ
significantly. For example, if the capacity of a minimum-efficient-scale
plant in the secondary market were significantly greater than the needs of
a minimum-efficient-scale plant in the primary market, entrants would
have to choose between inefficient operation at the secondary level
(because of operating an efficient plant at an inefficient output or because
of operating an inefficiently small plant) or a larger than necessary scale at
the primary level. Either of these effects could cause a significant increase
in the operating costs of the entering firm.
33
4.213 Structure and Performance of the Primary Market
Barriers to entry are unlikely to affect performance if the structure of
the primary market is otherwise not conducive to monopolization or collu-
sion.
34
The Department is unlikely to challenge a merger on this ground
unless overall concentration of the primary market is above 1800 HHI (a
somewhat lower concentration will suffice if one or more of the factors
discussed in Section 3.4 indicate that effective collusion is particularly like-
ly). Above that threshold, the Department is increasingly likely to
challenge a merger that meets the other criteria set forth above as the con-
centration increases.
33
It is important to note, however, that this problem would not exist if a significant outside
market exists at the secondary level. In that case, entrants could enter with the appropriately
scaled plants at both levels, and sell or buy in the market as necessary.
34
For example, a market with 100 firms of equal size would perform competitively despite
a significant increase in entry barriers.
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4.22 Facilitating Collusion Through Vertical Mergers
4.221 Vertical Integration to the Retail Level
A high level of vertical integration by upstream firms into the associated
retail market may facilitate collusion in the upstream market by making it
easier to monitor price. Retail prices are generally more visible than prices
in upstream markets, and vertical mergers may increase the level of ver-
tical integration to the point at which the monitoring effect becomes
significant. Adverse competitive consequences are unlikely unless the
upstream market is generally conducive to collusion and a large percentage
of the products produced there are sold through vertically integrated retail
outlets.
The Department is unlikely to challenge a merger on this ground unless
1) overall concentration of the upstream market is above 1800 HHI (a
somewhat lower concentration will suffice if one or more of the factors
discussed in Section 3.4 indicate that effective collusion is particularly like-
ly), and 2) a large percentage of the upstream product would be sold
through vertically-integrated retail outlets after the merger. Where the
stated thresholds are met or exceeded, the Department’s decision whether
to challenge a merger on this ground will depend upon an individual
evaluation of its likely competitive effect.
4.222 Elimination of a Disruptive Buyer
The elimination by vertical merger of a particularly disruptive buyer in a
downstream market may facilitate collusion in the upstream market. If
upstream firms view sales to a particular buyer as sufficiently important,
they may deviate from the terms of a collusive agreement in an effort to
secure that business, thereby disrupting the operation of the agreement.
The merger of such a buyer with an upstream firm may eliminate that
rivalry, making it easier for the upstream firms to collude effectively.
Adverse competitive consequences are unlikely unless the upstream
market is generally conducive to collusion and the disruptive firm is
significantly more attractive to sellers than the other firms in its market.
The Department is unlikely to challenge a merger on this ground unless
1) overall concentration of the upstream market is 1800 HHI or above (a
somewhat lower concentration will suffice if one or more of the factors
discussed in Section 3.4 indicate that effective collusion is particularly like-
ly), and 2) the allegedly disruptive firm differs substantially in volume of
purchases or other relevant characteristics from the other firms in its
market. Where the stated thresholds are met or exceeded, the
Department’s decision whether to challenge a merger on this ground will
depend upon an individual evaluation of its likely competitive effect.
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Withdrawn January 2020
4.23 Evasion of Rate Regulation
Non-horizontal mergers may be used by monopoly public utilities sub-
ject to rate regulation as a tool for circumventing that regulation. The
clearest example is the acquisition by a regulated utility of a supplier of its
fixed or variable inputs. After the merger, the utility would be selling to
itself and might be able arbitrarily to inflate the prices of internal transac-
tions. Regulators may have great difficulty in policing these practices, par-
ticularly if there is no independent market for the product (or service) pur-
chased from the affiliate.
35
As a result, inflated prices could be passed
along to consumers as “legitimate” costs. In extreme cases, the regulated
firm may effectively preempt the adjacent market, perhaps for the pur-
pose of suppressing observable market transactions, and may distort
resource allocation in that adjacent market as well as in the regulated
market. In such cases, however, the Department recognizes that genuine
economies of integration may be involved. The Department will consider
challenging mergers that create substantial opportunities for such
abuses.
36
4.24. Efficiencies
As in the case of horizontal mergers, the Department will consider ex-
pected efficiencies in determining whether to challenge a vertical merger.
See Section 3.5 (Efficiencies). An extensive pattern of vertical integration
may constitute evidence that substantial economies are afforded by ver-
tical integration. Therefore, the Department will give relatively more
weight to expected efficiencies in determining whether to challenge a ver-
tical merger than in determining whether to challenge a horizontal merger.
35
A less severe, but nevertheless serious, problem can arise when a regulated utility acquires
a firm that is not vertically related. The use of common facilities and managers may create an
insoluable cost allocation problem and provide the opportunity to charge utility customers
for non-utility costs, consequently distorting resources allocation in the adjacent as well as the
regulated market.
36
Where a regulatory agency has the responsibility for approving such mergers, the Depart-
ment may express its concerns to that agency in its role as competition advocate.
30