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Downstream Merger with Oligopolistic Input Suppliers

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  • Kjell Erik Lommerud
  • Odd Rune Straume
  • Lars Sørgard

Abstract

We examine how a downstream merger affects input prices and, in turn, the profitability of a such a merger under Cournot competition with differentiated products. Input suppliers can be interpreted as ordinary upstream firms, or trade unions organising workers. If the input suppliers are plant-specific, we find that a merger is more profitable than in a corresponding model with exogenous input prices. In contrast to the received literature, we find that it can be more profitable to take part in a merger than being an outsider. For firm-specific input suppliers, on the other hand, results are reversed. We apply our model to endogenous merger formation in an international oligopoly, and show that the equilibrium market structure is likely to be characterised by cross-border merger.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 733.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_733

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Keywords: merger profitability; input suppliers; trade unions; cross-border merger;

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References

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  1. Lommerud, K.E. & Sorgard, L., 1997. "Merger and Product Range Rivalery," Norway; Department of Economics, University of Bergen 165, Department of Economics, University of Bergen.
  2. Horn, H. & Wolinsky, A., 1988. "Bilateral Monopolies And Incentives For Merger," Papers 410, Stockholm - International Economic Studies.
  3. Joseph Farrell & Carl Shapiro, 1990. "Asset Ownership and Market Structure in Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 275-292, Summer.
  4. Bughin, Jacques, 1999. "The strategic choice of union-oligopoly bargaining agenda," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 1029-1040, October.
  5. Paz Espinosa, Maria & Rhee, Changyong, 1989. "Efficient Wage Bargaining as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 565-88, August.
  6. Horn, Henrik & Persson, Lars, 2001. "Endogenous mergers in concentrated markets," International Journal of Industrial Organization, Elsevier, vol. 19(8), pages 1213-1244, September.
  7. Horn, Henrik & Wolinsky, Asher, 1988. "Worker Substitutability and Patterns of Unionisation," Economic Journal, Royal Economic Society, vol. 98(391), pages 484-97, June.
  8. Sang V Nguyen & Robert H Mcguckin & Arnold P Reznek, 1995. "The Impact Of Ownership Change On Employment, Wages, And Labor Productivity In U.S. Manufacturing 1977-87," Working Papers 95-8, Center for Economic Studies, U.S. Census Bureau.
  9. Juan Carlos Bárcena-Ruiz & María Begoña Garzón, 2000. "Corporate merger, organizational form, and control of labor," Spanish Economic Review, Springer, vol. 2(2), pages 129-144.
  10. Lommerud, K.E. & Straume, O.R. & Sorgard, L., 2000. "Merger Profitability in Unionized Oligopoly," Papers 9/00, Norwegian School of Economics and Business Administration-.
  11. Gonzalez-Maestre, Miguel & Lopez-Cunat, Javier, 2001. "Delegation and mergers in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 19(8), pages 1263-1279, September.
  12. Straume, Odd Rune, 2002. "Union collusion and intra-industry trade," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 631-652, May.
  13. Steffen Huck & Kai A. Konrad & Wieland Müller, 2004. "Profitable Horizontal Mergers without Cost Advantages: The Role of Internal Organization, Information and Market Structure," Economica, London School of Economics and Political Science, vol. 71(284), pages 575-587, November.
  14. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
  15. Petrakis, Emmanuel & Vlassis, Minas, 2000. "Endogenous scope of bargaining in a union-oligopoly model: when will firms and unions bargain over employment?," Labour Economics, Elsevier, vol. 7(3), pages 261-281, May.
  16. Farrell, J. & Shapiro, C., 1988. "Horizontal Mergers: An Equilibrium Analysis," Papers 17, Princeton, Woodrow Wilson School - Discussion Paper.
  17. Davidson, Carl, 1988. "Multiunit Bargaining in Oligopolistic Industries," Journal of Labor Economics, University of Chicago Press, vol. 6(3), pages 397-422, July.
  18. Jagadeesh Gokhale & Erica L. Groshen & David Neumark, 1993. "Do Hostile Takeovers Reduce Extramarginal Wage Payments?," NBER Working Papers 4346, National Bureau of Economic Research, Inc.
  19. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
  20. 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, vol. 98(2), pages 185-99, May.
  21. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
  22. Anthony Creane & Carl Davidson, 2004. "Multidivisional firms, internal competition, and the merger paradox," Canadian Journal of Economics, Canadian Economics Association, vol. 37(4), pages 951-977, November.
  23. Dowrick, Steve, 1989. "Union-Oligopoly Bargaining," Economic Journal, Royal Economic Society, vol. 99(398), pages 1123-42, December.
  24. repec:fth:calaec:10-00 is not listed on IDEAS
  25. Baye, Michael R & Crocker, Keith J & Ju, Jiandong, 1996. "Divisionalization, Franchising, and Divestiture Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 86(1), pages 223-36, March.
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Cited by:
  1. Lukach, R. & Plasmans, J.E.J., 2002. "Measuring Knowledge Spillovers using Patent Citations: Evidence from the Belgian Firm's Data," Open Access publications from Tilburg University urn:nbn:nl:ui:12-92281, Tilburg University.

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