Bargining, Bundling, and Clout: The Portfolio Effects of Horizontal Mergers

Daniel P. O'Brien () and Greg Shaffer ()
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Daniel P. O'Brien: Federal Trade Commission
Greg Shaffer: University of Rochester

RAND Journal of Economics, 2005, vol. 36, issue 3, 573-595

Abstract: We examine the output and profit effects of horizontal mergers between differentiated upstream firms in an intermediate-goods market served by a downstream monopolist. If the merged firm can bundle, transfer pricing is efficient before and after the merger. Absent cost efficiencies, consumer and total welfare do not change. If the merged firm cannot bundle and its bargaining power is sufficiently high, transfer pricing is inefficient after the merger. Absent cost efficiencies, welfare typically falls. We evaluate the profit effects of mergers for the case of two-part tariff contracts. Rival firms gain (lose) from mergers that raise (lower) downstream prices. Contrary to conventional wisdom, a merger that harms the retailer may increase welfare.

Date: 2005
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