Can Vertical Merger Analysis be Salvaged After the AT&T/Time-Warner Merger Decision?

By Malcolm B. Coate

The AT&T/Time-Warner decision rejected the Department of Justice’s challenge to AT&T’s vertical acquisition of the cable programmer, Time Warner. The litigation focused on a post-Chicago vertical theory that looked good on paper, but could not be substantiated in practice. As the theoretical model imposed a specific structure on the competitive process, its rejection was hardly surprising. Competition in the cable industry involves complex static and dynamic considerations that tend to preclude the application of a static bargaining model. It is important to remember that game theoretic analyses define possibility models, not scientific fact. Simpler vertical theories, focused on the ability of such mergers to enhance or maintain monopoly power by the creation of barriers to entry, avoid the problems that doomed the AT&T/TW investigation. Possible examples are presented to illustrate the concepts in network markets.

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