The Microsoft Acquisition of Activision: Neither Horizontal nor Vertical

We study the Microsoft–Activision acquisition through the lens of a complementary-product merger. When two complementary good producers consolidate, the merger is not horizontal because the two firms do not produce substitutable goods. Nor is the merger vertical, as neither firm supplies the other. We develop an economic model to study these types of mergers that allows for the possibility of rivals exiting the market. Three main conclusions flow from our analysis. (1) The welfare effects of the Microsoft–Activision acquisition are ambiguous; they depend on several industry factors. (2) One will not obtain the correct welfare effects using an incorrect vertical structure; harm to consumers will typically be larger in a complementary-product merger relative to a vertical one. (3) Consumer harm associated with rivals' exit due to the merger might substantially reduce welfare even if it is a welfare-enhancing merger absent exit. Our analysis provides an analytical roadmap for the antitrust enforcement authorities regarding the theories of harm in complementary-good mergers.