Microsoft Case Poses Crucial Test for FTC’s Fight Against ‘Vertical’ Mergers

Antitrust-enforcement agency seeks to block Activision purchase with arguments similar to those that have failed in the past

By Brent Kendall and Dave Michaels of The WSJ editorial. Here are the three types of mergers: 

Horizontal merger-A merger between companies in the same market. Ford and GM merging would be an example 

Vertical merger-A merger between a company supplying an input and a company buying it. Ford buying U.S. Steel is an example, since steel is an input in making cars. 

Conglomerate merger-A merger between companies in unrelated markets. An example would be if GM merged with Nabisco. 

Excerpts from The WSJ article:

"In challenging Microsoft Corp.’s $75 billion acquisition of Blizzard Inc., the Federal Trade Commission is building its marquee antitrust case of Chair Lina Khan’s tenure on expansive legal theories that haven’t prevailed in other recent cases. 

The lawsuit targets a so-called vertical merger that would combine Microsoft’s software, devices and cloud-computing business with Activision’s library of blockbuster videogames. The FTC argues the deal would give Microsoft the incentive and ability to degrade or withhold Activision’s content on rival systems, principally hurting Sony, its major competitor in gaming consoles and other platforms. 

In the typical antitrust case, the government challenges a horizontal merger, or one involving rivals that compete head-to-head. Such mergers, by removing a competitor from the marketplace, can increase concentration, a factor that can be used to infer harmful future effects such as higher prices.

The government has struggled to win cases on vertical mergers because making claims about the potential future harms posed by such deals is less straightforward and can require complex speculation about how market forces might play out."

"Government agencies have historically policed vertical mergers less forcefully than horizontal ones, under the theory that vertically integrated companies can offer lower prices or better products, including through increased efficiency. Microsoft could, for instance, lower the price for its Xbox gaming console because it profits from selling Activision’s games."

"harms could come if a merged firm deters the rest of the industry from innovating or denies resources needed by rivals. 

Predicting a vertical deal’s effects is tricky, and antitrust authorities don’t have the analytical tools to reliably do it, said Michael Salinger, a professor at Boston University and a former FTC chief economist. 

“The models are not precise enough to nail down which way the effects go,” Dr. Salinger said. “I think they are going to have a tough time in court.”"

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