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Vertical mergers in the technology, media and telecom sector – OECD – June 2019 OECD discussion

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This presentation by the OECD Secretariat was made during the discussion “Vertical mergers in the technology, media and telecom sector” held at the 131st meeting of the OECD Competition Committee on 7 June 2019. More papers and presentations on the topic can be found out at

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Vertical mergers in the technology, media and telecom sector – OECD – June 2019 OECD discussion

  1. 1. Vertical Mergers in the Technology, Media and Telecom Sector 1 Pedro Gonzaga ( OECD COMPETITION COMMITTEE
  2. 2. Vertical mergers… Are they a problem? 2 99% of the literature focuses on the competitive risks 1% of the literature focuses on efficiencies (exceptions) (general case)
  3. 3. What does the empirical literature say? 3 7 0 27 0 5 10 15 20 25 30 Undetermined Negative Positive or Neutral Number of studies Impact of vertical integration on consumer welfare Source: Based on two surveys of the literature: Lafontaine and Slade (2007) and Global Antitrust Institute (2018). • Some studies find evidence of harm to competitors (e.g. foreclosure) • But evidence of consumer harm is more limited…
  4. 4. Enforcement generally reflects empirical evidence 4  Vertical mergers account for a small share of merger enforcement.  Most decisions involve remedies, while prohibitions are rare. Horizontal 87% Vertical 8%  Most authorities recognise that vertical mergers are less problematic than horizontal mergers. Source: Based on 2017 data from 26 jurisdictions (Allen & Overy, 2018)
  5. 5. Why are vertical mergers less problematic than horizontal mergers? 5 Price / quality externalities Production efficiency Net welfare effect Horizontal Merger Horizontal externalities (-) Economies of scale (+) ? Vertical Mergers Vertical externalities (+) Economies of scope (+) + Direct effects of a merger: Vertical mergers can only harm competition indirectly BUT HOW?
  6. 6. Vertical theories of harm 6 Elimination of potential entrants Elimination of entry facilitators Customer foreclosure Raising rivals’ costs Lowering rivals’ revenues Evasion of regulation Misuse of sensitive information Price discrimination Information exchanges Increase of cost symmetry Input foreclosure Weakening maverick Elimination of disruptive buyer Foreclosure threat Improved bargaining position Unilateral incentive to raise prices Elimination of disruptive seller
  7. 7. Main vertical theories of harm (by type of asset) 7 Asset FORECLOSURE (unilateral effect) COLLUSION (coordinated effect) Input Input foreclosure Elimination of a disruptive seller Customer base Customer foreclosure Elimination of a disruptive buyer Commercially sensitive information Misuse of commercially sensitive information Exchange of sensitive information Most theories of harm are variations of these general theories Alternative theories are rarely investigated in practice.  E.g. price discrimination (generally pro-competitive).
  8. 8. How to identify harmful vertical mergers? 8 Ability Incentive Effect Requires control over an important and unique asset Depends on diversion ratios and price margins Harm (indirect) > Efficiencies (direct)
  9. 9. What is the best enforcement action? 9 • Remedies are often less restrictive than a prohibition decision. • Although structural remedies are usually preferred, behavioural remedies might be appropriate to address vertical theories of harm. Behavioural remedies 62% Full prohibition 17% Abandoned 12% Structural remedies 9% Source: Based on 68 vertical merger cases between 2015 and 2017 (ICN & CMA, 2018)
  10. 10. Why the focus on the TMT sector? 10 • Potentially greater ability: – Big data, IPRs, platforms… • Potentially greater incentive: – Block entry, avoid regulation, counter bargaining power… • But also greater scope for efficiencies: – Economies of scope, quality externalities, hold-up problem… It is crucial to look at the effects on consumers
  11. 11. Merger intervention in the TMT sector in 2017 11 Consumer & Retail 16% Industrial & Manufacturing 29% Financials 6% Life Sciences 13% Others 20% Technology 6% Media 5% Telecom 5% TMT 16% Share of merger intervention in the TMT sector (16%) Share of M&A activity in the TMT sector (24%)<
  12. 12. Vertical Mergers in the Technology, Media and Telecom Sector 12 Pedro Gonzaga ( OECD COMPETITION COMMITTEE