Horizontal mergers in the presence of vertical relationships.

Ghosh, Arghya and Morita, Hodaka and Wang, Chengsi (2014): Horizontal mergers in the presence of vertical relationships.

Abstract

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 cost-inefficient 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: merger, successive oligopoly, welfare, reallocation, rationalization.
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance; L - Industrial Organization > L4 - Antitrust Issues and Policies; L - Industrial Organization > L5 - Regulation and Industrial Policy

References

Aguirre, Inaki and Simon Cowan and John Vickers. 2010. ``Monopoly Price Discrimination and Demand Curvature'', American Economic Review, Vol. 100(4): pp. 1601-1615.

Bhattacharyya, Sugato and Amrita Nain. 2011. ``Horizontal Acquisition and Buying Power: A Product Market Analysis'', Journal of Financial Economics, Vol. 99: pp. 97-115.

Chen, Zhiqi. 2003. ``Dominant Retailers and the Countervailing Power Hypothesis'', RAND Journal of Economics, Vol. 34(4): pp. 612-625.

Cowan, Simon. 2007. ``The Welfare Effects of Third-Degree Price Discrimination with Nonlinear Demand Functions'', RAND Journal of Economics, Vol. 38(2): pp. 419-428.

Deneckere, Raymond and Carl Davidson. 1985. ``Incentives to Form Coalitions with Bertrand Competition'', RAND Journal of Economics, Vol. 16(4): pp. 473-486.

Dobson, Paul and Michael Waterson. 1997. ``Countervailing Power and Consumer Prices'', Economic Journal, Vol. 107(441): pp. 418-430.

Farrell, Joseph and Carl Shapiro. 1990. ``Horizontal Mergers: An Equilibrium Analysis'', American Economic Review, Vol. 80(1): pp. 107-126.

Fabinger, Michal and Glen Weyl. 2012. ``Pass-Through and Demand Forms'', working paper.

Galbraith, John. 1952. ``A Theory of Price Control'', Cambridge, Mass. : Harvard University Press.

Ghosh, Arghya and Hodaka Morita. 2007. ``Free Entry and Social Efficiency under Vertical Oligopoly'', RAND Journal of Economics, Vol. 38(2): pp. 541-554.

Greenhut, Melvin and Hiroshi Ohta. 1979. ``Vertical Integration of Successive Oligopolists'', American Economic Review, Vol. 69(1): pp. 137-141.

Horn, Henrick and Asher Wolinsky. 1988. ``Bilateral Monopolies and Incentives for Merger'', RAND Journal of Economics, Vol. 19(3): pp. 408-419.

Inderst, Roman. 2010. ``Models of Vertical Market Relations'', International Journal of Industrial Organization, Vol. 28(4): pp. 341-344.

Lommerud, Kjell and Odd Straume and Lars Sorgard. 2005. ``Downstream Merger with Upstream Market Power'', European Economic Review, Vol. 49: pp. 717-743.

Lommerud, Kjell and Odd Straume and Lars Sorgard. 2008. ``National versus International Mergers in Unionized Oligopoly'', Rand Journal of Economics, Vol. 37(1): pp. 212-233.

Mankiw, Gregory and Michael Whinston. 1986. ``Free Entry and Social Inefficiency'', RAND Journal of Economics, Vol. 17(1): pp. 48-58.

McAfee, Preston and Michael Williams. 1992. ``Horizontal Mergers and Antitrust Policy'', Journal of Industrial Economics, Vol. 40(2): pp. 181-187.

Milliou, Chrysovalantou and Emmanuel Petrakis. 2007. ``Upstream Horizontal Mergers, Vertical Contracts, and Bargaining'', International Journal of Industrial Organization, Vol. 25(5): pp. 963–987.

Nocke, Volker and Michael Whinston. 2010. ``Dynamic Merger Review'', Journal of Political Economy, Vol. 118(6): pp. 1200-1251.

Nocke, Volker and Michael Whinston. 2013. ``Merger Policy with Merger Choice'', American Economic Review, Vol. 103(2): pp. 1006-1033.

Perry, Martin and Robert Porter. 1985. ``Oligopoly and the Incentive for Horizontal Merger'', American Economic Review, Vol. 75(1): pp. 219-227.

Peitz, Martin and Marcus Reisinger. 2014. ``Indirect Taxation in Vertical Oligopoly '', Journal of Industrial Economics,forthcoming.

Reisinger, Marcus and Monica Schnitzer. 2012. ``Successive Oligopolies with Differentiated Firms and Endogeneous Entry'', Journal of Industrial Economics, Vol. 60(4): pp. 537-577.

Salant, Stephen and Sheldon Switzer and Robert Reynolds. 1983. ``Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium'', Quarterly Journal of Economics, Vol. 98(2): pp. 185-199.

Salinger, Michael. 1988. ``Vertical Mergers and Market Foreclosure'', Quarterly Journal of Economics, Vol. 103(2): pp. 345-356.

Snyder, Christopher. 1996. ``A Dynamic Theory of Countervailing Power'', Rand Journal of Economics, Vol. 27(4): pp. 747-769.

Suzumura, Kotaro and Kazuharu Kiyono. 1987. ``Entry Barriers and Economic Welfare'', Review of Economic Studies, Vol. 54(1): pp. 157-167.

Symeonidis, George. 2010. ``Downstream Merger and Welfare in a Bilateral Oligopoly'', International Journal of Industrial Organziation, Vol. 28(3): pp. 230-243.

Vives, Xavier. 2001. ``Oligopoly Pricing: Old Ideas and New Tools'', Cambridge, MA: MIT Press

von Ungern-Sternberg, Thomas. 1996. `Countervailing Power Revisited'', International Journal of Industrial Organization, Vol. 14(4): pp. 507-519.

Weyl, Glen and Michal Fabinger. 2013. ``Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition'', Journal of Political Economy, Vol. 121(3): pp. 521-583.

Ziss, Steffen. 1995. ``Vertical Separation and Horizontal Mergers'', Journal of Industrial Economics, Vol. 43(1): pp. 63-75.