Vertical Mergers and Input Foreclosure When Rivals Can Substitute Inputs: Safe Harbor for Low Share of Input Sales to Rivals?

By Serge Moresi & Marius Schwartz*

A vertical merger between a firm and an input supplier to that firm can generate efficiencies by eliminating double marginalization or alleviating other contracting inefficiencies. However, when the supplier also sells to that firm’s rivals, a key antitrust concern is input foreclosure: the merged firm might raise its input prices to downstream rivals, or otherwise degrade their access to the input, so as to raise rivals’ costs and increase its own profit from output sales. In some such cases, consumers in the downstream market also may be harmed. Concerns with input foreclosure featured prominently in high-profile vertical mergers such as Comcast/NBCU (2011) and AT&T/Time Warner (2018), where opponents alleged that the merged firm would use its video programming assets to disadvantage rival video distributors.¹ Ongoing concerns with foreclosure are also manifest in the Vertical Merger Guidelines issued on June 30, 2020 by the U.S. Department of Justice and Federal Trade Commission (hereafter, “VMG”).²

The U.S. antitrust agencies assess the risk of foreclosure by considering whether the merged firm has both the ability to impede rivals significantly and the incentive to do so (VMG, pp. 4-5). In searching for observable metrics to guide this assessment, a plausible intuition is that foreclosure risk is low when the input supplied by the merged firm can be substituted (imperfectly) with other inputs supplied by upstream r