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Vertical Mergers with Input Substitution: Double Marginalization, Foreclosure and Welfare

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We consider differentiated duopolists that face symmetric linear demands and produce using identical or different Cobb-Douglas technologies with a monopolized input and a competitively supplied input. A merger between the input monopolist and either firm eliminates double marginalization but—unlike with fixed-proportions technologies in the same setting—can lead to foreclosure and reduce consumer welfare and total welfare. The same can occur under a CES technology with greater input substitutability than Cobb-Douglas. When firms use identical Cobb-Douglas technologies, the merged firm raises the rival’s cost by more, and the welfare effects are worse, when the input it controls constitutes a low rather than high share of downstream input costs. If that share is sufficiently low then consumer welfare and total welfare decline, while rising elsewhere despite foreclosure. With different Cobb-Douglas technologies, the input monopolist may foreclose completely either firm pre-merger. A merger’s welfare effects then can be non-monotonic in the monopoly input’s share of costs. Classification-L4, L41, L42

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  • Serge Moresi & Serge Moresi & Marius Schwartz, 2021. "Vertical Mergers with Input Substitution: Double Marginalization, Foreclosure and Welfare," Working Papers gueconwpa~21-21-03, Georgetown University, Department of Economics.
    • Handle: RePEc:geo:guwopa:gueconwpa~21-21-03
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    1. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-685, Winter.
    2. Inderst, Roman & Valletti, Tommaso, 2011. "Incentives for input foreclosure," European Economic Review, Elsevier, vol. 55(6), pages 820-831, August.
    3. Moresi, Serge & Schwartz, Marius, 2017. "Strategic incentives when supplying to rivals with an application to vertical firm structure," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 137-161.
    4. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347-347.
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    1. Moresi, Serge & Schwartz, Marius, 2021. "Vertical mergers with input substitution: Double marginalization, foreclosure and welfare," Economics Letters, Elsevier, vol. 202(C).
    2. Serge Moresi & David Reitman & Steven C. Salop & Yianis Sarafidis, 2021. "Vertical Mergers in a Model of Upstream Monopoly and Incomplete Information," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 59(2), pages 363-380, September.
    3. Konstantinos G. Papadopoulos & Emmanuel Petrakis & Panagiotis Skartados, 2022. "The ambiguous competitive effects of passive partial forward ownership," Southern Economic Journal, John Wiley & Sons, vol. 89(2), pages 540-568, October.
    4. Papadopoulos, Konstantinos G. & Petrakis, Emmanuel & Skartados, Panagiotis, 2021. "The ambiguous competitive effects of passive partial forward integration," UC3M Working papers. Economics 33354, Universidad Carlos III de Madrid. Departamento de Economía.

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    Keywords

    Vertical Mergers; Foreclosure; Input Substitution; Antitrust;
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