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Simulating mergers in a vertical supply chain with bargaining

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  • Gloria Sheu
  • Charles Taragin

Abstract

We model a two‐level supply chain where Nash bargaining occurs upstream and firms compete in a logit setting downstream, either via Bertrand price setting or an auction. The parameters can be calibrated with a discrete set of data on prices, margins, and market shares, facilitating use by antitrust practitioners. We perform numerical simulations to identify cases where modelling the full vertical structure is important and where harm is likely. We also examine the thwarted Anthem/Cigna merger and show how the model weighs the various arguments made by the government and the defendants.

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  • Gloria Sheu & Charles Taragin, 2021. "Simulating mergers in a vertical supply chain with bargaining," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 596-632, September.
    • Handle: RePEc:bla:randje:v:52:y:2021:i:3:p:596-632
    DOI: 10.1111/1756-2171.12385
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    Cited by:

    1. William P. Rogerson, 2020. "Modelling and predicting the competitive effects of vertical mergers: The bargaining leverage over rivals effect," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(2), pages 407-436, May.
    2. Mansley, Ryan & Miller, Nathan H. & Sheu, Gloria & Weinberg, Matthew C., 2023. "A price leadership model for merger analysis," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    3. Margaret Loudermilk & Gloria Sheu & Charles Taragin, 2023. "Beyond "Horizontal" and "Vertical": The Welfare Effects of Complex Integration," Finance and Economics Discussion Series 2023-005, Board of Governors of the Federal Reserve System (U.S.).
    4. Michael Vita & Keith Brand & Miriam Larson-Koester & Nathan Petek & Charles Taragin & William Violette & Daniel H. Wood, 2022. "Economics at the FTC: Estimating Harm from Deception and Analyzing Mergers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 61(4), pages 405-438, December.
    5. Xiaowei Yu & Keith Waehrer, 2024. "Recursive Nash-in-Nash bargaining solution," Economics Bulletin, AccessEcon, vol. 44(1), pages 11-24.
    6. Margaret E. Slade, 2021. "Vertical Mergers: A Survey of Ex Post Evidence and Ex Ante Evaluation Methods," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(4), pages 493-511, June.
    7. Panhans, Matthew T. & Taragin, Charles, 2023. "Consequences of model choice in predicting horizontal merger effects," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    8. Slade, Margaret E., 2019. "Vertical Mergers: Ex Post Evidence and Ex Ante Evaluation Methods," Microeconomics.ca working papers margaret_e._slade-2019-10, Vancouver School of Economics, revised 25 Jun 2019.
    9. Luke M. Froeb & Vladimir Mares & Steven Tschantz & Charles Taragin, 2018. "The simple algebra of surplus in private values open auctions: A nested logit merger model," Economics Bulletin, AccessEcon, vol. 38(4), pages 2304-2312.
    10. William P. Rogerson, 2021. "The Upstream Pass-Through Rate, Bargaining Power and the Magnitude of the Raising Rivals’ Costs (RRC) Effect," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 59(2), pages 205-227, September.
    11. Luke M. Froeb & Russell W. Pittman & Charles S. Taragin & Steven Tschantz & Gregory J. Werden, 2018. "Economics at the Antitrust Division: 2017–2018," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 53(4), pages 637-651, December.
    12. Gloria Sheu & Charles Taragin, 2021. "Simulating mergers in a vertical supply chain with bargaining," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 596-632, September.
    13. Kadner-Graziano, Alessandro S., 2023. "Mergers of Complements: On the Absence of Consumer Benefits," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    14. Francine Lafontaine & Margaret E. Slade, 2021. "Presumptions in Vertical Mergers: The Role of Evidence," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 59(2), pages 255-272, September.
    15. Carlton, Dennis W., 2020. "Transaction costs and competition policy," International Journal of Industrial Organization, Elsevier, vol. 73(C).

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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