Types of Mergers Analyzed Under Section 7 of the Clayton Act
Mergers which are likely to substantially lessen competition or tend to create a monopoly in any line of commerce are illegal under Section 7 of the Clayton Act, 15 U.S.C.S. § 18. The type of merger — horizontal, vertical, or conglomerate — will affect consideration of the potential illegality of the merger.
A horizontal merger is a merger of direct competitors. Such a merger by definition lessens competition to some extent, and the courts will look to the effect of the merger on competition to determine whether there is a potential for a substantial lessening of competition or a tendency to create a monopoly. Determining that effect normally requires an analysis of the market in which the merging companies compete. Economists have devised complex market models based on relevant economic and statistical data, and elements of those models are used to determine levels of concentration or market share among viable competitors in the market of the merging companies. Trends in such concentration also are examined in order to make a reasonable determination of the probable effects of the merger.
A vertical merger is a merger between a seller and its buyer or between companies at separate levels of distribution in a particular line of business. For example, a merger between a manufacturer of computers and a retailer of that manufacturer’s computers would be considered a vertical merger. To determine the potential for a substantial lessening of competition or a tendency toward a monopoly, a court will consider the effect of the merger in each of the two markets, that of the manufacturer and the retailer. If the merger will make entry of other competitors into either market more difficult, then an effect upon competition will have been determined. If either market becomes more concentrated among fewer competitors, the potential for lessening of competition or for a tendency toward monopoly becomes more pronounced and simpler for the court to define and declare illegal.
A conglomerate merger is a merger that is neither a horizontal merger nor a vertical merger. By definition, conglomerate mergers are less likely than horizontal or vertical mergers to be considered illegal under Section 7 of the Clayton Act. However, if the conglomerate merger is likely to reduce the potential for entry of a new competitor into a market, then the merger may be more suspect. “Pure” conglomerate mergers, in which the merging firms do not participate in the same product or geographic markets, have less potential for lessening competition than “market extension” conglomerate mergers in which either the product lines or geographic areas of the merging entities overlap to some extent.
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