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Downstream Mergers And Entry

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Author Info
Ramón Faulí-Oller () (Universidad de Alicante)
Joel Sandonís () (Universidad de Alicante)
Abstract

We 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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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2007-21.pdf
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File Function: Fisrt version / Primera version, 2007
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Publisher Info
Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2007-21.

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Length: 22 pages
Date of creation: Nov 2007
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Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2007-21

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Related research
Keywords: 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

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kamien, Morton I & Zang, Israel, 1993. "Monopolization by Sequential Acquisition," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 205-29, October.
  2. Rasmusen, Eric, 1988. "Entry for Buyout," Journal of Industrial Economics, Blackwell Publishing, vol. 36(3), pages 281-99, March. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. ANTHONY M. MARINO & JÁN ZÁBOJNÍK, 2006. "Merger, Ease Of Entry And Entry Deterrence In A Dynamic Model," Journal of Industrial Economics, Blackwell Publishing, vol. 54(3), pages 397-423, 09. [Downloadable!] (restricted)
  5. Lommerud, Kjell Erik & Straume, Odd Rune & Sorgard, Lars, 2005. "Downstream merger with upstream market power," European Economic Review, Elsevier, vol. 49(3), pages 717-743, April. [Downloadable!] (restricted)
  6. Kjell Erik Lommerud & Odd Rune Straume & Lars Sorgard, 2006. "National Versus International Mergers in Unionized Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 37(1), pages 212-233, Spring.
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  7. Kamien, Morton I. & Zang, Israel, 1991. "Competitively cost advantageous mergers and monopolization," Games and Economic Behavior, Elsevier, vol. 3(3), pages 323-338, August. [Downloadable!] (restricted)
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  8. Elzinga, Kenneth G, 1970. "Predatory Pricing: The Case of the Gunpowder Trust," Journal of Law & Economics, University of Chicago Press, vol. 13(1), pages 223-40, April.
  9. Cabral, Luis M. B., 2003. "Horizontal mergers with free-entry: why cost efficiencies may be a weak defense and asset sales a poor remedy," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 607-623, May. [Downloadable!] (restricted)
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  10. Stephane Caprice, 2005. "Incentive to encourage downstream competition under bilateral oligopoly," Economics Bulletin, Economics Bulletin, vol. 12(9), pages 1-5. [Downloadable!]
  11. Werden, Gregory J & Froeb, Luke M, 1998. "The Entry-Inducing Effects of Horizontal Mergers: An Exploratory Analysis," Journal of Industrial Economics, Blackwell Publishing, vol. 46(4), pages 525-43, December. [Downloadable!] (restricted)
  12. Morton I. Kamien & Israel Zang, 1988. "The Limits of Monopolization Through Acquisition," Discussion Papers 802, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  13. Spector, David, 2003. "Horizontal mergers, entry, and efficiency defences," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1591-1600, December. [Downloadable!] (restricted)
  14. Stéphane Caprice, 2006. "Multilateral Vertical Contracting with an Alternative Supply: The Welfare Effects of a Ban on Price Discrimination," Review of Industrial Organization, Springer, vol. 28(1), pages 63-80, 02. [Downloadable!] (restricted)
  15. Dobson, Paul W & Waterson, Michael, 1997. "Countervailing Power and Consumer Prices," Economic Journal, Royal Economic Society, vol. 107(441), pages 418-30, March. [Downloadable!] (restricted)
  16. Sen, Debapriya & Tauman, Yair, 2007. "General licensing schemes for a cost-reducing innovation," Games and Economic Behavior, Elsevier, vol. 59(1), pages 163-186, April. [Downloadable!] (restricted)
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