File labelled "vertical merger"
VoxEU Column Competition Policy Institutions and economics

Balancing elimination of double marginalisation and market foreclosure: A closer look at vertical mergers

The 2020 US Vertical Merger Guidelines and notable legal cases have reignited debates about the complexities of vertical integration. A central point of contention revolves around how antitrust evaluations consider efficiency claims. This discussion has renewed interest in a long-established efficiency gain known as the elimination of double marginalisation, prompting questions about its actual benefits, merger specificity, and its interaction with possible foreclosure effects. This column explains how to navigate this intricate landscape. It argues that a one-size-fits-all approach is likely insufficient and highlights the importance of bargaining power and asymmetric information for the impact on consumer welfare.

The 2020 revision of the US Vertical Merger Guidelines, alongside high-profile legal battles, have thrust the intricate world of vertical integration into the spotlight. 1 A key aspect of these debates centres on the evaluation of efficiency claims, an aspect notably absent from earlier guideline versions. This discussion has rekindled interest in a classic economic concept – the elimination of double marginalisation (EDM). 2

Antitrust experts have debated whether consumers genuinely benefit from EDM, if these efficiency gains are truly unique to mergers, and the relationship between EDM and the potential market foreclosure resulting from vertical integration. 3 As early as 2018, the Federal Trade Commission (FTC) Bureau of Competition Director argued that vertical mergers, by eliminating double marginalisation, inherently promote competition through downward price pressure.  4 In contrast, in 2020, two FTC Commissioners challenged the notion that "vertical mergers often benefit consumers through EDM", and found the Guidelines overly optimistic about the positive effects of EDM in practice. 5

Many economists, among them Kwoka and Slade (2020), underlined that vertical integration is not always necessary to achieve the benefits of EDM and that the alleged gains of EDM are merger-specific only if they cannot be achieved by other (less socially costly) means. Traditional economic theory on EDM suggests a simple two-part pricing schedule as a solution, which does not inherently require a merger-specific approach.

A theoretical rationale for the elimination of double marginalisation

In our recent paper (Choné et al. 2023), we contribute to this ongoing debate by providing a theoretical rationale for merger-specific double marginalisation. Our analysis introduces the crucial element of asymmetric information about suppliers' costs into the equation. In this environment, conventional nonlinear pricing alone fails to eliminate double marginalisation when vertical separation persists.

More precisely, we consider a procurement environment characterised by competition and bargaining under conditions of asymmetric information. Here, an intermediary buyer operates within an upstream market and serves the demand of final consumers. This procurement process comprises two fundamental phases – a selection phase followed by a negotiation phase – mirroring common practices across various industries.

The buyer maximises her expected profit at the selection phase, anticipating the subsequent bargaining with the selected supplier. We do not restrict attention to any particular extensive-form bargaining game. We adapt the mechanism design approach of Loertscher and Marx (2022) to model the negotiation of price and quantity under asymmetric information.

We find that double marginalisation is part of the optimal mechanism – from the point of view of the buyer – and the extent of double marginalisation is inversely related to the bargaining power of the supplier. At the limit, with balanced bargaining power, asymmetric information ceases to matter and double marginalisation vanishes.

Are we returning to the Chicago school of thought?

In a sense, the Chicago narrative – that elimination of double marginalisation represents a merger-specific efficiency gain – is vindicated by the presence of asymmetric information when there is only one supplier. However, real-world procurement generally involves multiple suppliers, and vertical integration may hinder more efficient independent suppliers from participating.

Our research reveals that market foreclosure does occur in equilibrium, sparking the crucial question of its impact on final consumers. The replacement of a more efficient independent supplier by a less efficient internal one does not necessarily harm consumers because double marginalisation persists when the independent supplier is active.

Balancing elimination of double marginalisation and market foreclosure

We consider two symmetric suppliers, 0 and 1. By convention, if vertical integration takes place, the buyer merges with Supplier 0. Figure 1 summarises the consequences of vertical integration.

Figure 1 The effect of the merger on consumers’ surplus

Figure 1 The effect of the merger on consumers’ surplus

Because the buyer does not know the suppliers’ costs, she has to leave informational rents to them. Under asymmetric information, the quantities sold are inversely related to the ‘virtual’ costs (represented by the Greek letter Ψ in Figure 1). Virtual costs exceed the real costs and decrease as the supplier's bargaining power increases. When a supplier wields as much power as the buyer, virtual and actual costs are equal, resulting in no DM under vertical separation.

Panel A of Figure 1 depicts the equilibrium under vertical separation in the cost space, assuming that the suppliers have identical cost distributions. The most efficient supplier delivers the product, and the contractual quantity is the monopoly quantity associated to the selected supplier’s virtual cost. Supplier selection is efficient, but double marginalisation endures (unless the selected supplier is as powerful as the buyer).

In Panel B of Figure 1, we depict the post-merger equilibrium. The buyer has acquired Supplier 0, and the merged entity maximises their joint profit. It is as if the acquired supplier’s bargaining power had been equalised with the buyer’s one.

In the OE1 area (the white area of Figure 1b), consumers are unaffected by vertical integration. This is because the independent supplier (Supplier 1) continues to sell the same quantity under both integration and separation. However, exploitation occurs: now that the buyer can threaten to procure in-house, Supplier 1 must offer better terms to the buyer.

The Chicago narrative applies when the acquired supplier is more efficient than the independent one (the blue area of Figure 1b). Supplier 0 sells – a scenario identical to vertical separation – resulting in the elimination of double marginalisation. Consumers benefit from the merger.

Market foreclosure occurs when the independent supplier would sell under vertical separation but is excluded after vertical integration (the OCE area of Figure 1b). Whether this harms consumers depends on the balance between EDM and market foreclosure.

When the acquired supplier is not significantly less efficient than the independent one (the emerald ODC area of Figure 1b), consumers benefit from the merger. EDM outweighs the productive inefficiency induced by vertical integration.

Conversely, the replacement of the independent supplier by a significantly less efficient Supplier 0 harms consumers through reduced quantities (the red ODE area of Figure 1b). Here, the productive inefficiency induced by the vertical integration outweighs the benefits of EDM.

To sum up, the exclusion of the independent supplier can either promote or hinder competition. In the latter case, the Chicago narrative falls short. Importantly, both the likelihood of anticompetitive foreclosure and the magnitude of consumer harm increase with the suppliers’ bargaining power.

Empirical literature and future research directions

While much of the empirical literature on vertical relationships relies on complete information and linear pricing, recent advances in the empirical bargaining literature (see Larsen 2021 and Larsen and Zhang 2021) on the one hand, and nonlinear pricing (see the recent survey by Perrigne and Vuong 2019) on the other, highlight the significance of asymmetric information. We believe that combining these two strands of literature can illuminate procurement environments with asymmetric information, potentially identifying suppliers' production costs and bargaining weights.

As antitrust authorities continue to grapple with the complexities of vertical mergers, it becomes increasingly clear that a one-size-fits-all approach may not suffice. The Chicago narrative is not obsolete but a closer examination of pre-merger negotiations is essential to evaluating the impact of vertical integration on consumer welfare within the context of double marginalisation and market foreclosure. Only through a nuanced understanding of these issues can policymakers make informed decisions that promote both competition and consumer interests in evolving markets.


Choné, P, L Linnemer and T Vergé (2023), "Double marginalization, market foreclosure, and vertical integration", CEPR Discussion Papers 18239 (forthcoming in the Journal of the European Economic Association).

Chopra, R (2020), “Dissenting Statement Regarding the Publication of Vertical Merger Guide- lines Commission”, Federal Trade Commission, 30 June.

Dobbelaere, S, G McCormack, D Prinz and S Sóvágó (2023), "Firm consolidation and labour market outcomes",, 6 January.

Kwoka, J and M Slade (2020), "Second thoughts on double marginalization", Antitrust 34(51).

Larsen, B J (2021), "The efficiency of real-world bargaining: Evidence from wholesale used-auto auctions", Review of Economic Studies 88(2): 851-882.

Larsen, B and A Lee Zhang (2021), "Quantifying bargaining power under incomplete information: A supply-side analysis of the used-car industry", Available at SSRN 3990290.

Loertscher, S and L M Marx (2022), "Incomplete information bargaining with applications to mergers, investment, and vertical integration", American Economic Review 112(2): 616-649.

Perrigne, I and Q Vuong (2019), "Econometrics of auctions and nonlinear pricing", Annual Review of Economics 11: 27-54.

Slaughter, R K (2020), “Dissenting Statement”, In re FTC-DOJ Vertical Merger Guide-lines, Commission File No. P810034, Federal Trade Commission.


  1. See the 2020 US Vertical Merger Guidelines as well as the failed attempts by US authorities to prohibit the acquisition of Time Warner by AT&T (United States v. AT&T Inc., No. 1:17-cv-02511 (D.D.C. 2017)), of Farelogix by Sabre (United States v. Sabre Corp. et al. No 1:99-mc-0999 (D. Del. 2020); the merger was eventually prohibited by the UK Competition and Markets Authority in April 2020) or the merger between Sprint and T-Mobile (State of New York, et al., v. Deutsche Telekom AG, et al. No 1:19-cv-05434- VM-RWL (S.D.N.Y. 2020); this case raised both horizontal and vertical concerns).
  2. Beyond industrial organisation and antitrust, a recent VoxEU column Dobbelaere et al. (2023) discusses the link between mergers and labour market outcomes.
  3. Public comments (many of them by economists) on the draft Vertical Merger Guidelines are available at After a change of majority at the Federal Trade Commission, the guidelines were withdrawn in September 2021 because “the guidelines adopted a particularly flawed economic theory regarding purported pro-competitive benefits of mergers, despite having no basis of support in the law or market reality.’’ The DoJ stated that the guidelines remain in place at the Department of Justice. In January 2022, the agencies announced a broad initiative to evaluate potential updates and revisions to the Horizontal Merger Guidelines, issued in 2010, and the Vertical Merger Guidelines issued in 2020. Last, in July 2023, a new draft of FTC-DoJ Merger Guidelines were released and public comments solicited. Guideline 6 warns that “Vertical mergers should not create market structures that foreclose competition.’’ The draft does not mention the elimination of double marginalisation.
  4. Section 6 of the Guidelines, “Procompetitive effects”, is almost entirely devoted to the elimination of double marginalisation.
  5. The two commissioners voted against the publication of the Guidelines, see their dissenting statements, Chopra (2020) and Slaughter (2020). In September 2021, a few weeks after Lina Khan became the new FTC Chairman, the FTC decided after a 3-2 vote to withdraw the 2020 Guidelines. The new majority argued that “[t]he VMG’s reliance on EDM is theoretically and factually misplaced”.