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"Vertical Market Power" as Oxymoron: Getting Convergence Mergers Right

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  • Brennan, Timothy

    ()
    (Resources for the Future)

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    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.

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    Bibliographic Info

    Paper provided by Resources For the Future in its series Discussion Papers with number dp-01-39.

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    Date of creation: 01 Aug 2001
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    Handle: RePEc:rff:dpaper:dp-01-39

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    Keywords: Vertical mergers; electricity restructuring; vertical integration; convergence; energy regulation;

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