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Predicting the impact of upstream mergers on downstream markets with an application to the retail gasoline industry

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  • Manuszak, Mark D.
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    Abstract

    This paper presents an empirical model of oligopolistic supply and demand that reflects divisions between downstream retailers and upstream suppliers in order to evaluate the potential effects of upstream mergers. The demand model allows for downstream product differentiation, while the supply model allows upstream firms to inherit market power from their affiliated retailers. The supply and demand models are jointly estimated using data on the retail gasoline industry for the Hawaiian islands in the 1990s. A number of hypothetical upstream mergers in the Hawaiian retail gasoline industry are simulated to evaluate the effects of the mergers on market outcomes and welfare. Various scenarios with post-merger cost savings are also considered.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 28 (2010)
    Issue (Month): 1 (January)
    Pages: 99-111

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    Handle: RePEc:eee:indorg:v:28:y:2010:i:1:p:99-111

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    Web page: http://www.elsevier.com/locate/inca/505551

    Related research

    Keywords: Upstream and downstream competition Merger analysis Differentiated products oligopoly Retail gasoline industry Petroleum industry;

    References

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    1. Pesendorfer, Martin, 2003. " Horizontal Mergers in the Paper Industry," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 495-515, Autumn.
    2. Raphael Thomadsen, 2005. "The Effect of Ownership Structure on Prices in Geographically Differentiated Industries," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 908-929, Winter.
    3. Bonnet, Céline & Dubois, Pierre & Simioni, Michel, 2004. "Two-Part Tariffs versus Linear Pricing between Manufacturers and Retailers: Empirical Tests on Differentiated Products Markets," IDEI Working Papers 370, Institut d'Économie Industrielle (IDEI), Toulouse, revised Apr 2006.
    4. Justine S. Hastings, 2004. "Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California," American Economic Review, American Economic Association, vol. 94(1), pages 317-328, March.
    5. Villas-Boas, Sofia B., 2007. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt6gz1t778, Department of Agricultural & Resource Economics, UC Berkeley.
    6. K. Sudhir & Vrinda Kadiyali & Vithala R. Rao, 2001. "Structural Analysis of Manufacturer Pricing in the Presence of a Strategic Retailer," Yale School of Management Working Papers ysm229, Yale School of Management.
    7. Jean-Pierre Dubé, 2005. "Product Differentiation and Mergers in the Carbonated Soft Drink Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(4), pages 879-904, December.
    8. Pinkse, Joris & Slade, Margaret E., 2004. "Mergers, brand competition, and the price of a pint," European Economic Review, Elsevier, vol. 48(3), pages 617-643, June.
    9. Conley, T. G., 1999. "GMM estimation with cross sectional dependence," Journal of Econometrics, Elsevier, vol. 92(1), pages 1-45, September.
    10. Andrea Shepard, 1993. "Contractual Form, Retail Price, and Asset Characteristics in Gasoline Retailing," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 58-77, Spring.
    11. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
    12. K. Sudhir, 2001. "Structural Analysis of Manufacturer Pricing in the Presence of a Strategic Retailer," Marketing Science, INFORMS, vol. 20(3), pages 244-264, October.
    13. Jacquemin, Alexis & Slade, Margaret E., 1989. "Cartels, collusion, and horizontal merger," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 7, pages 415-473 Elsevier.
    14. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
    15. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
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    Cited by:
    1. Nilsen, Øivind Anti & Sørgard, Lars & Ulsaker, Simen A., 2013. "Upstream Merger in a Successive Oligopoly: Who Pays the Price?," Discussion Paper Series in Economics 17/2013, Department of Economics, Norwegian School of Economics.

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