Vertical Mergers in a Model of Upstream Monopoly and Incomplete Information (original) (raw)

Upstream mergers, downstream mergers, and secret vertical contracts

Research in Economics, 2001

In an industry characterised by secret vertical contracts, we consider a benchmark case where two vertical chains exist, with two upstream manufacturers selling to two downstream retailers, and show that the equilibrium prices are independent of whether upstream or downstream¯rms have all the bargaining power. We then analyse two alternative mergers, and show that a downstream merger (which gives the downstream monopolist all the bargaining power) is more welfare detrimental than an upstream merger (which gives the bargaining power to the upstream monopolist). We also show that downstream and upstream mergers have the same e®ects when contracts are observable.

‘On the Profitability and Welfare Effects of Downstream Mergers’

We consider an upstream firm selling an input to several downstream firms through non-discriminatory two-part tariff contracts. Downstream firms can alternatively buy the input from a less efficient source of supply. We show that downstream mergers lead to lower wholesale prices. They translate into lower final prices only when the alternative supply is inefficient enough. Downstream mergers are very profitable in this setting and monopolization is the equilibrium outcome of a merger game even for unconcentrated markets.

Monopolization through endogenous vertical mergers

Research in Economics, 2007

While endogenous merger analysis has been applied to horizontal mergers, the thrust of vertical merger analysis has been based on exogenous mergers. The goal of this paper is to analyze endogenous vertical mergers. I consider a market structure with a downstream monopolist and an oligopolistic upstream industry. The downstream monopolist chooses to buy a certain number of the upstream firms. Mergers are endogenous, in the sense that the bids made by the downstream firm must be accepted by each of the integrated upstream firms, and must not exceed the increase in the profits of the downstream firm. It is shown that the unique equilibrium is complete monopolization: the buyer buys all the firms in the upstream industry. This result is consistent with the result that vertical mergers are profitable. However, it is in contrast with horizontal endogenous mergers, where complete monopolization is generally not an equilibrium.

THE WELFARE EFFECTS OF UPSTREAM MERGERS IN THE PRESENCE OF DOWNSTREAM ENTRY BARRIERS*

International Economic Review, 2006

We examine the incentives for upstream firms to consolidate horizontally and the impact of this process on industry performance, when there are downstream entry barriers and firms negotiate bilaterally. In the short run, consumers are not worse off with upstream mergers, since consolidation only results in a redistribution of industry rents. In the long run, consumers are better off after upstream mergers, since they induce more entry into that segment. When social welfare is evaluated, a limit on upstream consolidation may prevent excessive entry; but upstream entry can be sometimes insufficient, if the retailers' intrinsic bargaining power is excessive.

Upstream Horizontal Mergers, Bargaining, and Vertical Contracts

2005

Contrary to the seminal paper of Horn and Wolinsky (1988), we demonstrate that upstream firms, which sell their products to competing downstream firms, do not always have incentives to merge horizontally. In particular, we show that when bargaining takes place over two-part tariffs, and not over wholesale prices, upstream firms prefer to act as independent suppliers rather than as a monopolist supplier. Moreover, we show that horizontal mergers can be procompetitive, even in the absence of efficiency gains.

Welfare Effects of Downstream Mergers and Upstream Market Concentration

The Singapore Economic Review, 2015

We consider a dominant upstream firm selling an input to several downstream firms through observable, non-discriminatory two-part tariff contracts. Downstream firms can alternatively buy the input from a less efficient source of supply. In this setting, we analyze the relationship between the competitive effects of downstream mergers and the level of concentration at the upstream level. We show that a downstream merger leads to lower wholesale prices. This translates into lower final prices only when the upstream market is sufficiently concentrated. In this case, a downstream merger tends to be both procompetitive and profitable.

Horizontal Mergers in the Presence of Vertical Relationships

SSRN Electronic Journal, 2014

We study welfare effects of horizontal mergers under a successive oligopoly model and find that downstream mergers can increase welfare if they reduce input prices. The lower input price shifts some input production from costinefficient upstream firms to cost-efficient ones. Also, the lower input price makes upstream entry less attractive, reduces the number of upstream entrants, and decreases their average costs in the presence of fixed entry costs. We identity necessary and sufficient conditions for a reduction in input prices and welfare-improving horizontal mergers under a general demand function. Qualitative nature of our findings remains unchanged for upstream mergers.

A Note on Vertical Mergers with an Upstream Monopolist: Foreclosure and Consumer Welfare Effects

2015

This note develops a simple model in which an upstream monopolist sells an input used by two downstream competitors.1 Those downstream firms in turn compete to sell their products to consumers. The note addresses two related issues. First, does a vertical merger between the upstream monopolist and one of the downstream firms create an incentive for the merged firm to raise price to its unintegrated downstream rival, or at the extreme, completely cut off sales to that rival? Second, does that vertical merger increase or decrease downstream prices, that is, does it reduce or raise the welfare of consumers. Both these questions need to be analyzed because