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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Paper provided by European University Institute in its series Economics Working Papers with number
eco99/38.
Length: 24 pages Date of creation: 1999 Date of revision: Handle: RePEc:eui:euiwps:eco99/38
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Find related papers by JEL classification: D40 - Microeconomics - - Market Structure and Pricing - - - General L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
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