Self-Preferencing

Abstract

When markets at successive or complementary stages are imperfectly competitive, firms that operate at multiple stages typically have a strong incentive to purchase from, sell to, or otherwise coordinate with its own operations at adjacent stations compared with those of individual firms. But, to the extent that such self-preferencing eliminates double marginalization that would occur under vertical separation or otherwise facilitates coordination that is difficult to accomplish between firms, competition rules that discourage self-preferencing, such as restrictions on vertical mergers or integration, can harm consumers. In 2020, the United States Department of Justice and Federal Trade Commission issue revised vertical merger guidelines that promised enforcement that more nearly resembles how they review horizontal mergers – that is, by predicting effects on static pricing incentives. But the economics of how vertical mergers on pricing incentives is more complicated than the economics of how horizontal mergers affect pricing incentives. If U.S. enforcement is based on a consumer welfare standard, the U.S. agencies will struggle to find a robust methodology for distinguishing anticompetitive from procompetitive vertical mergers. Self-preferencing has also played a key role in allegations of anticompetitive behavior in technologically advancing industries. A review of past allegations of anticompetitive product innovation against IBM, Microsoft, and Google reveals the challenges in designing rules that limit self-preferencing without acting as a drag on innovation.