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Upstream Mergers, Downstream Mergers, and Secret Vertical Contracts

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  • Fumagalli, C.
  • Motta, M.

Abstract

In an industry characterised by secret vertical contracts, we consider a benchmark case where two vertical chains exist, with two upstream manufacturers selling to two downstream retailers, and show that the equilibrium prices are independent of whether upstream or downstream firms have all the bargaining power. We then analyse two alternative mergers, and show that a downstream merger (which gives the downstream monopolist all the bargaining power) is more welfare detrimental than an upstream merger (which gives the bargaining power to the upstream monopolist). We also show that downstream and upstream mergers have the same effects when contracts are observable.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number eco99/38.

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Length: 24 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:eui:euiwps:eco99/38

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Keywords: MERGERS ; VERTICAL INTEGRATION ; MARKET STRUCTURE;

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References

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  1. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn.
  2. Andreas IRMEN, 1995. "Note on Duopolistic Vertical Restraints," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9507, Université de Lausanne, Faculté des HEC, DEEP.
  3. Irmen, Andreas, 1998. " Precommitment in Competing Vertical Chains," Journal of Economic Surveys, Wiley Blackwell, vol. 12(4), pages 333-59, September.
  4. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Patrick Rey & Joseph E. Stiglitz, 1990. "Vertical Restraints and Producers' Competition," NBER Working Papers 2601, National Bureau of Economic Research, Inc.
  6. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
  7. Paul Dobson & Michael Waterson, 1999. "Retailer power: recent developments and policy implications," Economic Policy, CEPR & CES & MSH, vol. 14(28), pages 133-164, 04.
  8. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  9. Gal-Or, Esther, 1991. "Duopolistic vertical restraints," European Economic Review, Elsevier, vol. 35(6), pages 1237-1253, August.
  10. Lin, Y Joseph, 1988. "Oligopoly and Vertical Integration: Note," American Economic Review, American Economic Association, vol. 78(1), pages 251-54, March.
  11. Greg Shaffer, 1991. "Slotting Allowances and Resale Price Maintenance: A Comparison of Facilitating Practices," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 120-135, Spring.
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Cited by:
  1. Symeonidis, George, 2010. "Downstream merger and welfare in a bilateral oligopoly," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 230-243, May.
  2. Marie-Laure Allain & Saïd Souam, 2005. "Concentration horizontale et relations verticales," Working Papers 2005-31, Centre de Recherche en Economie et Statistique.

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