Horizontal Mergers and Supplier Power

Joe Perkins () and Shiva Shekhar ()
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Joe Perkins: Compass Lexecon and Queen’s College
Shiva Shekhar: Tilburg School of Economics and Management (TiSEM)

Review of Industrial Organization, 2024, vol. 64, issue 4, No 3, 533-548

Abstract: Abstract Supplier market power—such as the ability of branded goods suppliers to dictate terms to retailers—is an important feature of many markets. We show that supplier power can counteract the effects of downstream mergers on consumer prices where there are two-part contracts. This is because greater market power allows suppliers to set contracts that internalise partially the impact of the merger on downstream prices. Post-merger, the supplier reduces the per-unit price at which it supplies the merged downstream firms, with the aim of maintaining total industry profitability—and then recoups the profits via a larger fixed fee. We modify the standard upward pricing pressure (UPP) formula to account for the supplier’s response to a horizontal merger in the downstream market, while preserving much of the simplicity of the standard approach.

Keywords: Merger analysis; Antitrust; Upward pricing pressure; Unilateral effects; Vertical relations; Supplier power (search for similar items in EconPapers)
JEL-codes: L42 L44 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11151-024-09947-z

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