Economic Tools for Analyzing Vertical Mergers in Healthcare

Several recent investigations of vertical transactions in healthcare, along with the promulgation of new draft Vertical Merger Guidelines by the FTC and the DOJ, suggest that vertical deals will continue to receive scrutiny from antitrust enforcers. While the VMG set forth the general framework that the agencies will use to assess vertical mergers, they provide few specifics on implementation. Nor do they address the specific issues that may arise in healthcare transactions. In this article, we describe the two primary types of unilateral harm in vertical mergers — foreclosure and raising rivals’ costs — and economic models that can be used to evaluate the level of antitrust risk associated with a vertical transaction. We also explain how these models can practically be used to assess proposed transactions.

By Josh Lustig, Sean May, Monica Noether & Ben Stearns¹

I. INTRODUCTION

The Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) recently released Draft Vertical Merger Guidelines (“VMG”),² which describe the framework under which the federal antitrust agencies propose to evaluate vertical mergers. “Vertical” mergers involve firms that operate at different levels of the supply chain and are distinguished from “horizontal” mergers, which combine firms that compete at the same level of the supply chain. In vertical mergers, economists differentiate upstream firms, which produce an input or provide a service that m