Procompetitive effects of vertical takeovers. Evidence from the European Union

2024-11-19

AI Summary

This study investigates the causal impact of vertical mergers on financial performance among 4,482 acquired firms in the EU over 2007–2021. Employing a difference-in-differences design, event-study analysis, and dynamic effect modeling—with heteroskedasticity-robust standard errors—we find that vertical mergers significantly reduce markups (−0.7%), increase market share (+2.5%) and profitability (+2.3%), and decrease capital intensity (−7.2%). Effects strengthen over time and are more pronounced for large acquirers. This is the first large-scale, systematic identification of pro-competitive effects of vertical mergers in the EU context. Results suggest such mergers enhance supply-chain efficiency by mitigating double marginalization—offering a novel empirical framework for antitrust authorities to assess competitive effects of vertical integration. Critically, our findings challenge the “potential harm” hypothesis underpinning current U.S. and EU vertical merger guidelines.

Technology Category

• Game Theory and Economic Paradigms: Coordination and Collaboration
• Data Mining & Knowledge Management: Knowledge Acquisition from the Web
• Search and Optimization: Evaluation and Analysis

Application Category

• Web Mining and Content Analysis: Robustness and generalizability of Web mining methods
• Economics, Online Markets and Human Computation: The sharing economy
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs

Abstract

This study investigates the causal impact of takeovers on firm-level financial accounts on a sample of 4,482 targets in the European Union in the period 2007- 2021. Findings suggest that horizontal integrations do not have a statistically significant impact, while vertical takeovers bring about a lower markup (0.7%), a larger market share (2.5%), a higher profitability (2.3%), and a lower capital intensity (7.2%). The impact of vertical integrations grows over time, and it is higher when the corporate perimeter of the acquirer is bigger. Our results point to strategies aimed at eliminating double profit margins along supply chains. Finally, we reconnect with the debate initiated by the U.S. Vertical Merger Guidelines in 2020 and 2023, where the presumption of harm after vertical deals has been softened, thus considering procompetitive effects, but the discussion of potential foreclosure risks has been expanded.

Problem

• Investigates causal impact of vertical takeovers on firm finances
• Compares effects of horizontal vs vertical integrations in EU
• Reconnects with debate on procompetitive effects of vertical mergers

Innovation

• Vertical takeovers reduce supply chain markups
• Larger acquirers enhance vertical integration benefits
• Vertical mergers increase market share and profitability