Downstream horizontal mergers and wholesale price discrimination

Konstantinos Charistos (), Christos Constantatos and Ioannis Pinopoulos
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Konstantinos Charistos: University of Macedonia, Thessaloniki, Greece

Economics Bulletin, 2020, vol. 40, issue 4, 3124-3130

Abstract: This paper provides a theoretical model that highlights the fact that market power and/or efficiency gains associated with a downstream merger create asymmetries between merged and non-merged firms, which in turn may lead an upstream supplier to engage in price discrimination. We consider a supply chain with one supplier and three differentiated retailers that compete in a Cournot-Nash fashion. Trade is conducted via observable two-part tariffs. We assume that two retailers decide to merge. Pre-merger, all retailers obtain the same marginal wholesale price since they are identical. Post-merger, the larger merged entity – because it is more cost-efficient and it is endowed with a larger product portfolio – obtains a lower marginal wholesale price than its non-merged rival. Allocative efficiency increases and, different from existing merger theory in one-tier markets, the merger always increases consumer surplus and total welfare regardless of the magnitude of the efficiency gains.

Keywords: Vertical relations; Horizontal mergers; Wholesale price discrimination; Market power; Efficiency gains; Welfare (search for similar items in EconPapers)
JEL-codes: L2 L4 (search for similar items in EconPapers)
Date: 2020-11-27
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