Bargaining Competition and Vertical Mergers: The Problem of Model Selection

Willem H. Boshoff (), Luke M. Froeb (), Wihan Marais (), Roan J. Minnie () and Steven Tschantz ()
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Willem H. Boshoff: Stellenbosch University
Luke M. Froeb: Stellenbosch University
Wihan Marais: Stellenbosch University
Roan J. Minnie: Stellenbosch University
Steven Tschantz: Vanderbilt University

Review of Industrial Organization, 2025, vol. 66, issue 2, No 3, 183 pages

Abstract: Abstract The assumptions that distinguish bargaining models from one another are rarely observed, but can predetermine their predictions. In this paper, we map various popular bargaining models into vertical merger predictions across two competitive landscapes that consist of either one upstream firm and two downstream firms, or vice-versa. The models’ assumptions vary with respect to: (i) How parties bargain (Derived Demand versus Nash-in-Nash versus Nash-in-Shapley); and (ii) Over what (linear wholesale prices versus two-part prices versus quantity). The paper and accompanying online vertical merger simulator are designed to help economists and enforcers select the bargaining model that best characterizes observed pre-merger competition, and the loss of such competition following a vertical merger, in a given setting. The paper is designed to supplement the horizontal and vertical merger simulators that have been developed by economists who have served at the Federal Trade Commission and Justice Department.

Keywords: Bargaining; Vertical merger; Nash-in-Nash; Nash-in-Shapley; Rectangular logit demand; Nested logit demand (search for similar items in EconPapers)
JEL-codes: C78 D86 L14 L42 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11151-025-10009-1

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