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Welfare Improving Horizontal Mergers in Successive Oligopoly

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  • Arghya Ghosh
  • Hodaka Morita
  • Chengsi Wang

Abstract

We study welfare effects of horizontal mergers in a successive oligopoly model with general demand. We find that downstream mergers can increase welfare if they reduce input price. In an environment with asymmetric upstream firms, lower input price reallocates some input production from cost‐inefficient upstream firms to cost‐efficient ones. In the presence of fixed cost and free entry, lower input price rationalizes the upstream sector and decreases average cost of production for each upstream firm. Both reallocation and rationalization can improve welfare. We identify necessary and sufficient conditions for welfare‐improving horizontal mergers and explore how demand curvature, market structure and Herfindahl index (in case of asymmetric firms) affect these conditions. The possibility of consumer surplus improvement and upstream mergers is also explored.

Suggested Citation

  • Arghya Ghosh & Hodaka Morita & Chengsi Wang, 2022. "Welfare Improving Horizontal Mergers in Successive Oligopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 70(1), pages 89-118, March.
    • Handle: RePEc:bla:jindec:v:70:y:2022:i:1:p:89-118
    DOI: 10.1111/joie.12285
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    References listed on IDEAS

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    1. Noriaki Matsushima & Shohei Yoshida, 2022. "The countervailing power hypothesis and contingent contracts," ISER Discussion Paper 1191, Institute of Social and Economic Research, Osaka University.

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