Despite the common view that vertical mergers are generally less problematic than horizontal mergers, it is also recognized that they are not always innocuous. We discuss and explain a remarkably general scenario in which a vertical merger reduces social surplus. In a setup in which suppliers’ costs are their own private information, if the pre-integration market involves a buyer using an efficient procurement process to purchase from the suppliers, then the post-integration market will be less efficient than the pre-integration market. Specifically, the integrated firm will, at least sometimes, source the input internally, from its integrated supplier, even though an independent supplier has a lower cost. This happens because bilateral bargaining between the integrated firm and the independent supplier is inefficient – it suffers from what economists refer to as a Myerson-Satterthwaite problem.

By Simon Loertscher & Leslie M. Marx1



The U.S. Department of Justice and Federal Trade Commission’s “Vertical Merger Guidelines” (June 30, 2020) emphasize positive effects of vertical integration:2 “Vertical mergers combine complementary economic functions and eliminate contracting frictions, and therefore have the capacity to create a range of potentially cognizable efficiencies that benefit competition and consumers” (p. 11). That said, they also recognize that “While the agencies more often encounter problematic horizontal mergers tha


Please sign in or join us
to access premium content!