Downstream Mergers And Entry
AbstractWe consider an upstream firm selling an input to several downstream firms through observable two-part tariff contracts. Downstream firms can alternatively buy the input from a less efficient source of supply. We show that downstream mergers lead to lower wholesale prices. They translate into lower final prices only when the alternative supply is inefficient enough. Downstream mergers are very profitable in this setting and monopolization is the equilibrium outcome of a merger game even for unconcentrated markets. Finally, the expectation of monopolization stimulates wasteful entry of downstream firms in the industry, which calls for policy intervention.
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Bibliographic InfoPaper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2007-21.
Length: 22 pages
Date of creation: Nov 2007
Date of revision:
Publication status: Published by Ivie
downstream mergers; entry; two-part tariff contracts;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-10 (All new papers)
- NEP-COM-2007-11-10 (Industrial Competition)
- NEP-ENT-2007-11-10 (Entrepreneurship)
- NEP-IND-2007-11-10 (Industrial Organization)
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