Vertical integration and upstream horizontal mergers

Ioannis Pinopoulos

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: In this paper, we study upstream horizontal mergers in vertically related markets. A key aspect of our analysis is that one of the merging parties is a vertically integrated firm. We consider a two-tier market consisting of two competing vertical chains, with one upstream and one downstream firm in each chain. We assume that one vertical chain is vertically integrated whereas the other chain is vertically separated. We also assume that the vertically integrated chain is more cost-efficient in its downstream operations than the independent downstream firm. We show that a horizontal merger between the vertically integrated firm and the independent upstream supplier will increase the equilibrium input price and reduce both consumer and total welfare. When an upstream competitive fringe exists, however, the merger still decreases consumer surplus but it may increase total welfare. The latter finding is important since it implies that whether antitrust authorities favor a consumer or total welfare objective can lead to very different conclusions regarding the merger’s desirability.

Keywords: Vertical relations; vertical integration; horizontal mergers; welfare. (search for similar items in EconPapers)
JEL-codes: L11 L13 L41 L42 (search for similar items in EconPapers)
Date: 2016-11, Revised 2016-11
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
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