Jack Donaghy (Alec Baldwin) goes to Washington in Let’s Stay Together, the 30 Rock episode that aired on Thursday October 7 at 8:30/7:30c. The proposed deal between Cable Town and NBC has raised some political eyebrows, and Jack must represent the company at the Congressional hearings on the subject. Jack explains to Liz (Tina Fey) that he must appear before the fictional “House Subcommittee on Baseball, Quiz Shows, Terrorism, and Media” to discuss the concept of vertical integration.
At the hearing, Jack anticipates that the Subcommittee members will condemn vertical integration on the grounds it is “bad for America, kills innovation, and drives up prices.” Before they have a chance to voice a single concern, however, Jack pipes up with a tribute the the American farmer that seems to convince the Subcommittee members that vertical integration actually drives down prices by streamlining distribution. Jack may have convinced the Subcommittee, but does he have a legal leg to stand on or is his routine all smoke and mirrors?
The episode synopsis reveals that the deal between Cable Town ad NBC is a proposed merger between the two companies. When two businesses intend to consolidate to form a single entity, the planned merger must be submitted to the Antitrust Division of the Department of Justice for prior review. The purpose of the DOJ review is to investigate whether the plan is likely to have anticompetitive effects on the market, which would occur if the two companies, once merged, achieve sufficient market power to restrict product output and drive up consumer prices. Companies with market power are able to maintain a price below competitive levels long enough to put their competitors out of business. These entities are then positioned to exert exclusive control over the market by limiting product availability to drive up consumer demand and raising prices to maximize profits. See here.
The merger between NBC and Cable Town would be classified as a vertical integration because it would result in the “organization of successive production processeswithin a single firm, a firm being an entity that produces goods and services.” NBC, a television network, produces the product that is then distributed downstream to the consumer by Cable Town, a retailer of video programming. This type of consolidation is associated with increased efficiency and decreasedtransaction costs because different steps of the production chain are brought under common ownership and control, eliminating the need for costly contracts with independent suppliers and distributors. Because the DOJ recognizes these advantages, it does not subject vertical mergers to strict scrutinyeven though these types of deals can also have anticompetitive effects. Instead, the DOJ engages in a balancing test analysis to determine whether the efficiency gains achieved by the proposed merger would outweigh the anticompetitive impact. See here.
Jack’s rousing speech in front of the House subcommittee characterizes the American farmer as the perfect example of the efficiency benefits of vertical integration because the farmer owns his farm land, the equipment he uses to cultivate his crops, and the truck he drives to transport his goods to the farmers’ markets where he sells directly to the consumer. This argument won the favor of the Subcommittee members, and is supported by the economic theory underlying DOJ vertical merger enforcement policy. The NBC/Cable Town merger would likely result in cost savings for the two companies, which would ideally be passed on to the consumer. In addition, the consolidation would be unlikely to create the kind of market power that would raise antitrust concerns because the television production and distribution industries both enjoy an environment of healthy competition among several market participants. So, Jack probably would have persuaded the Committee members even if he hadn’t accused them of putting a bullet in the brain of the American farmer if they opposed vertical integration!