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Upstream Horizontal Mergers and Efficiency Gains

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  • Chrysovalantou Milliou
  • Apostolis Pavlou

Abstract

We study upstream horizontal mergers and their potential efficiency gains. We show that an upstream horizontal merger can give rise to two efficiency-enhancing effects when firms trade through two-part tariffs. It increases R&D investments and decreases wholesale prices when downstream competition is not too strong. Examining whether the merger’s potential efficiency gains can overcome its anti-competitive effects in terms of welfare, we show that when firms merge usually both of the above mentioned efficiencies are realized and they are passed on to consumers. This holds to a lesser extend when firms trade through linear contracts.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-08/cesifo1_wp2748.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2748.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2748

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Related research

Keywords: horizontal mergers; vertical relations; efficiency gains; two-part tariffs; merger policy;

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References

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  1. Roman Inderst & Christian Wey, 2001. "Bargaining, Mergers, and Technology Choice in Bilaterally Oligopolistic Industries," CIG Working Papers, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) FS IV 01-19, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  2. Catherine C. de Fontenay & Joshua S. Gans, 2005. "Vertical Integration in the Presence of Upstream Competition," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 544-572, Autumn.
  3. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(2), pages 185-99, May.
  4. Röller, Lars-Hendrik & Stennek, Johan & Verboven, Frank, 2000. "Efficiency Gains from Mergers," Working Paper Series, Research Institute of Industrial Economics 543, Research Institute of Industrial Economics.
  5. Ziss, Steffen, 1995. "Vertical Separation and Horizontal Mergers," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 43(1), pages 63-75, March.
  6. Patrick Rey & Thibaud Vergé, 2003. "Bilateral Control with Vertical Contracts," Industrial Organization, EconWPA 0309005, EconWPA.
  7. repec:ebl:ecbull:v:12:y:2008:i:3:p:1-7 is not listed on IDEAS
  8. Milliou, Chrysovalantou & Petrakis, Emmanuel, 2007. "Upstream horizontal mergers, vertical contracts, and bargaining," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 25(5), pages 963-987, October.
  9. Massimo MOTTA & Helder VASCONCELOS, 2003. "Efficiency Gains and Myopic Antitrust Authority in a Dynamic Merger Game," Economics Working Papers, European University Institute ECO2003/23, European University Institute.
  10. von Ungern-Sternberg, Thomas, 1996. "Countervailing power revisited," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 14(4), pages 507-519, June.
  11. Lommerud, Kjell Erik & Straume, Odd Rune & Sorgard, Lars, 2005. "Downstream merger with upstream market power," European Economic Review, Elsevier, Elsevier, vol. 49(3), pages 717-743, April.
  12. Stéphane Caprice, 2006. "Multilateral Vertical Contracting with an Alternative Supply: The Welfare Effects of a Ban on Price Discrimination," Review of Industrial Organization, Springer, Springer, vol. 28(1), pages 63-80, 02.
  13. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, American Economic Association, vol. 84(1), pages 210-30, March.
  14. George Symeonidis, 2008. "Downstream Competition, Bargaining, and Welfare," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 17(1), pages 247-270, 03.
  15. Emmanuel Petrakis & Chrysovalantou Miliou & Nikos Vettas, 2009. "(In)efficient trading forms in competing vertical chains," Working Papers, University of Crete, Department of Economics 0916, University of Crete, Department of Economics.
  16. Dobson, Paul W & Waterson, Michael, 1997. "Countervailing Power and Consumer Prices," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(441), pages 418-30, March.
  17. Banal-Estanol, Albert & Macho-Stadler, Ines & Seldeslachts, Jo, 2008. "Endogenous mergers and endogenous efficiency gains: The efficiency defence revisited," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(1), pages 69-91, January.
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Cited by:
  1. Chen, Yu-Fu & Funke, Michael, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2009-31, Scottish Institute for Research in Economics (SIRE).
  2. Yu-Fu Chen & Michael Funke, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," CESifo Working Paper Series 2759, CESifo Group Munich.

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