Non-horizontal Mergers
There are two basic forms of non-horizontal mergers: vertical mergers and conglomerate mergers.
Vertical mergers are mergers between firms that operate at different but complementary levels in the chain of production (e.g., manufacturing and an upstream market for an input) and/or distribution (e.g., manufacturing and a downstream market for re-sale to retailers) of the same final product. In purely vertical mergers there is no direct loss in competition as in horizontal mergers because the parties' products did not compete in the same relevant market. As such, there is no change in the level of concentration in either relevant market. Vertical mergers have significant potential to create efficiencies largely because the upstream and downstream products or services complement each other. Even so, vertical integration may sometimes give rise to competition concerns.
Vertical effects can produce competitive harm in the form of foreclosure. A merger is said to result in foreclosure where actual or potential rivals' access to supplies or markets is hampered or eliminated as a result of the merger, thereby reducing these companies' ability and/or incentive to compete.
Two forms of foreclosure can be distinguished. The first is where the merger is likely to raise the costs of downstream rivals by restricting their access to an important input (input foreclosure). The second is where the merger is likely to foreclose upstream rivals by restricting their access to a sufficient customer base (customer foreclosure).
However, it should be noted that in general vertical merger concerns are likely to arise only if market power already exists in one or more markets along the supply chain.
Conglomerate mergers involve firms that operate in different product markets, without a vertical relationship. They may be product extension mergers, i.e., mergers between firms that produce different but related products or pure conglomerate mergers, i.e., mergers between firms operating in entirely different markets. In practice, the focus is on mergers between companies that are active in related or neighbouring markets, e.g., mergers involving suppliers of complementary products or of products belonging to a range of products that is generally sold to the same set of customers in a manner that lessens competition.
Merger review in this area is controversial, as commentators and enforcement agencies disagree on the extent to which one can predict competitive harm resulting from such mergers. Such a disagreement is for instance illustrated by the different outcomes of the merger control reviews by the authorities of the United States and the European Union of the GE/Honeywell merger attempt.
Proponents of conglomerate theories of harm argue that in a small number of cases, where the parties to the merger have strong market positions in their respective markets, potential harm may arise when the merging group is likely to foreclose other rivals from the market in a way similar to vertical mergers, particularly by means of tying and bundling their products. When as a result of foreclosure rival companies become less effective competitors, consumer harm may result.
However, it should be stressed that in these cases there is a real risk of foregoing efficiency gains that benefits consumer welfare and thus the theory of competitive harm needs to be supported by substantial evidence.
Read more about this topic: Merger Control