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Vertical Market Power as Oxymoron:Getting Convergence Mergers Right
Timothy J. Brennan
RFF Discussion Paper 01-39 | August 2001
RESEARCH TOPICS:
Abstract
“Vertical market power” is a contradiction in terms because “market power” is essentially horizontal—that is, it depends on relationships of firms within markets. FERC invokes the term to assess “convergence” mergers between electricity generators and natural gas suppliers. It misapplies Department of Justice guidelines for vertical mergers and fails to identify exceptions to a presumption that market power depends only on competitive conditions at any single stage. A three-stage test can assess whether convergence mergers resemble horizontal ones. The key stage is the third: A convergence merger is more problematic the less vertical it is—that is, if the acquiring generator had no prior dealings with the acquired gas supplier. FERC’s analyses in leading convergence merger cases fail this test. Focusing on how convergence mergers facilitate regulatory evasion by linking regulated and unregulated enterprises, and how they reduce the ability to keep proprietary information from competitors, would be more productive approaches.
RELATED SUBTOPICS
Regulation
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