An unidentified employee walks into a Home Depot store in Auburn, California. Home Depot’s merger with distributor SRS Distribution is a recent example of vertical integration. (iStock photo/Chris Allan)

BLOOMINGTON, Ind. – Merger announcements often lead to concerns about whether competition will be reduced, which can lead to higher prices and reduced service quality for consumers. But a new research study co-authored by an Indiana University Kelley School of Business economist is attracting attention for highlighting important differences between two types of mergers and their implications for market outcomes.

“Horizontal mergers” combine companies in the same industry and at the same stage of production. One example was Kroger’s attempted acquisition of Albertson’s, which recently was blocked in federal and state courts. “Vertical mergers” (or vertical integration) combine firms at different levels of a supply chain. Retailer Home Depot’s acquisition of distributor SRS Distribution is a recent example.

For many years, antitrust authorities, such as the Department of Justice and Federal Trade Commission, took a more favorable view toward vertical compared to horizontal mergers, largely because vertical mergers generally are guaranteed to increase synergies by combining elements of the supply chain, whereas horizontal mergers are not.

Jeff Prince

However, over the past decade or so, there has been a push to increase scrutiny of vertical mergers to the point of putting them on par with horizontal mergers. This push culminated in the recently unified U.S. merger guidelines — for both horizontal and vertical mergers — replacing what had previously been separate merger guidelines across the two types.

Research by Jeff Prince, the Harold A. Poling Chair of Strategic Management and professor of business economics and public policy at Kelley, challenges this policy change, providing support for returning to reduced scrutiny of vertical mergers due to their guaranteed synergies. And it is the subject of an article published by the U.S. Chamber of Commerce, the world’s largest business organization.

Prince’s research focuses on industrial organization, applied econometrics, strategy, and regulation. He served as chief economist at the Federal Communications Commission during 2019 and 2020. At the FCC, he advised the chairman on economic policy, auction design, data analytics, and antitrust matters.

“Historically, vertical mergers are viewed as less problematic than horizontal mergers, for good reason. A new paper, ‘Integrating the Literature: Theory and Evidence from a Reassessment of the Empirical Research on Vertical Integration,’ provides compelling evidence to support how vertical mergers benefit consumers and the economy,” wrote Sean Heather, senior vice president for international regulatory affairs & antitrust at the U.S. Chamber.

The paper, written with Robert Kulick, managing director at NERA Economic Consulting and a visiting fellow at the American Enterprise Institute, and Elena Ramirez Pierce, senior consultant at NERA Economic Consulting, has been downloaded more than 100 times since being published to SSRN earlier this month.

“While it is undoubtedly true that, as many commentators have argued, more research on the welfare effects of vertical integration is needed, we believe that, nonetheless, important inferences can be drawn from the existing empirical literature,” Prince and his colleagues wrote.

“There is a large body of research demonstrating the potential for horizontal mergers to increase prices to the detriment of consumer welfare when mergers involve products that are close substitutes,” they added. “Our review of the literature demonstrates that the same cannot be said about vertical mergers.”

The paper establishes two major findings:

• Little evidence of anticompetitive outcomes and a relatively high incidence of procompetitive outcomes among existing empirical studies of vertical integration. Findings of anticompetitive outcomes were restricted to studies that utilized relatively weaker methods and/or data.
• Theory helps explain the lack of anticompetitive outcomes in the empirical studies. Specifically, for a wide range of plausible market conditions, leading theoretical models show the synergies from combining parts of the supply chain tend to dominate any anticompetitive effects (such as raising input prices on rivals).

Based on these findings, Prince and his co-authors arrived at the following conclusion: “We view our results as supporting the application of different antitrust review standards for vertical mergers versus horizontal mergers by, for instance, maintaining separate merger guidelines for vertical mergers.”

In his article about the paper, Heather echoed this conclusion, stating, “’Integrating the Literature’ highlights the need to distinguish between vertical and horizontal mergers in antitrust policy. With separate guidelines, policymakers can balance protecting competition with promoting economic dynamism. The Federal Trade Commission and the Department of Justice should return to standalone guidelines that recognize the unique dynamics of vertical integration.”

Prince, a Kelley faculty member since 2010, has been teaching and working on antitrust matters for more than 20 years. “Over-scrutinizing vertical mergers is wasteful of very limited government resources for antitrust enforcement. It is also costly to the firms being scrutinized,” he said. “The goal is to direct resources where they are best used, and our research shows that, as a general matter, resources used to scrutinize vertical mergers are substantially less likely to help reduce anticompetitive outcomes compared to horizontal mergers.”