Comcast-NBC and the Regulatory Road to Nowhere

Numerous questions have been raised about the proposed merger of Comcast and NBC Universal. How will the regulators evaluate the deal and reach a decision?
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By Jonathan Tomlin



) - The proposed merger between


(CMCSA) - Get Report


NBC Universal

has raised numerous questions and concerns by members of Congress, the Writers Guild of America, the Communications Workers of America, consumer advocates and entertainment industry firms.

In the language of economists, the Comcast/NBC combination may be described as a "vertical" merger (although it may raise horizontal issues as well). In other words, it represents a merger between parties operating in whole or in part at different levels of a distribution chain -- in this case programming content and cable services.

The Department of Justice and the Federal Communications Commission are both evaluating the competitive effects of the proposed deal and deciding whether or not to take action to block or modify the planned combination. Their ultimate decision could have important effects on entertainment industry workers, competitors, and consumers for many years to come.

How will the regulators evaluate the deal and reach a decision? For the Department of Justice, its "1984 Merger Guidelines" are supposed to be an official road map to the analytical steps that will be taken for a merger raising vertical issues. These guidelines purport to describe "the principal theories under which the Department is likely to challenge non-horizontal mergers" like Comcast/NBC. Various parties may understandably look to these purported guidelines in plotting a course for the future and deciding how to best voice any concerns.

Unfortunately, this would be a mistake. The current "guidelines" in effect for mergers like Comcast/NBC are obsolete and do not reflect either current economic thinking or the actual enforcement practices of the Department of Justice. They are, in effect, a road map missing new highways and showing roads that no longer exist. Despite protests by academics and antitrust practitioners for at least 15 years, nothing has been done to revise the guidelines. This regulatory road map to nowhere persists.

Current economic thinking on the competitive effects of vertical mergers has evolved significantly since 1984. It now bears little resemblance to the prevailing thinking of 26 years ago. A search on the American Economic Association's online publication database, for example, lists 179 articles in journals alone on the topic of vertical mergers since 1985. This excludes other avenues for scholarly research on the topic such as law reviews.

An important potential competitive effect noted in more recent economic literature is what economists call "vertical foreclosure." Vertical foreclosure occurs when a newly merged firm either raises the cost of an input or restricts access to this input to competing firms. Several members of Congress recently raised this concern regarding the Comcast/NBC merger -- that the newly formed entity might foreclose access to network programming to rival cable service providers or otherwise exercise undesirable control over media content. The current guidelines in existence for the Department of Justice do not mention vertical foreclosure.

The obsolescence of the prevailing 1984 Merger Guidelines is not limited to economic theory. Antitrust enforcement actions by the Department of Justice and Federal Trade Commission have also deviated from the guidelines promulgated by these agencies. Over 20 mergers involving vertical theories have been abandoned or settled by consent since 1984. Many of those involved concerns consistent with more recent economic thinking but not even mentioned in the 1984 Merger Guidelines.

Antitrust scholars and practitioners have noted the outdated nature of the guidelines in a variety of forums. Law review articles, speeches and newsletters have bemoaned the woefully inadequate status of the guidelines and called for revision. The Antitrust Modernization Commission, convened in 2007 and comprised of top antitrust attorneys and economists from across the country, also called for revision. While a proposed revision of the guidelines for horizontal mergers has recently been released, no revision has been made of the guidelines for non-horizontal mergers.

So, what kind of analysis is the Department of Justice doing to evaluate the Comcast/NBC deal? What can consumers, members of Congress, and entertainment industry firms expect? Based on the guidelines the Department of Justice purports to follow, we have no way to know.

Dr. Jonathan Tomlin is an antitrust economist and Principal at LECG, an international economic research and consulting firm.