The Department of Justice (DOJ) and Federal Trade Commission (FTC) are increasingly challenging vertical mergers which occur between companies that are not competitors but rather in different parts of the supple chain. While vertical mergers should not be immune from regulatory review, they are typically procompetitive. This should lead to a high burden of proof, and lower prioritization for regulators. Unfortunately, the FTC and DOJ seem to disagree, spending increasing amounts of time and taxpayer money challenging mergers with limited chances of consumer harm.
One example is the DOJ’s recent inquiry regarding the acquisition of doctor’s offices by Optum – a branch of UnitedHealth. While this is still only an inquiry, the DOJ previously tried, and failed, to block UnitedHealth’s acquisition of the healthcare technology company Change Healthcare and is also investigating UnitedHealth’s interest in buying a home healthcare company named Amedisys.
In 2023 both the DOJ and FTC adopted new guidelines on vertical mergers, including increased scrutiny on “vertical and non-horizontal mergers.”
Fortunately for consumers, courts have so far been reluctant to agree with the federal agencies’ expanded interpretation of their own powers. In the case of UnitedHealth’s acquisition of Change Healthcare the judge found that the DOJ’s argument was based on speculation as opposed to evidence.
The judge’s ruling matches the bulk of the economic evidence, which largely finds that vertical mergers increase efficiency. There is only limited empirical evidence that vertical mergers are anti-competitive, while the majority of evidence shows they streamline production of goods and services as well as increase consumer welfare. Studies show that while there are theoretical situations in which vertical mergers would be anticompetitive, vertical mergers are typically pro-consumer or neutral.
Despite courts holding the line against overzealous regulators, the cost of overcoming an FTC or DOJ challenge acts as a deterrent to beneficial mergers that could take place as well as delaying and increasing the cost of those that do.
While there can be reasons to worry about companies with a horizontal merger becoming a monopoly in a market, vertical mergers do not increase market concentration as it involves companies that operate in separate marketplaces. Despite this, both the FTC and DOJ have adopted new guidelines to regulate vertical mergers as though they would create monopolies.
Given the common benefits and rarity of harm, one study concluded that vertical mergers should only be prevented if there is direct evidence of likely harm. Additionally, time and resources spent attacking procompetitive vertical mergers is time that is not spent investigating business practices that harm consumers.
The FTC and DOJ should re-examine their priorities in how they use limited taxpayer resources and reprioritize protecting consumers from harm instead of challenging procompetitive business practices.
Without compelling evidence of risk, the default position should be not to challenge vertical mergers. Until the FTC and DOJ stop going beyond their role of consumer protection, the courts will remain the last line of defense preventing the FTC and DOJ from setting a precedent that will leave consumers worse off for years to come.
