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Downstream mergers in a vertically differentiated unionized oligopoly

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  • Borja Mesa Sánchez

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    (Dpto. Fundamentos del Análisis Económico)

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    Abstract

    In the context of an international unionized oligopoly, with vertical differentiation and downstream and upstream firms locked in a bilateral monopoly, the pattern of downstream mergers is investigated. In such a setting, a downstream merger leads to a reduction in the price of the inputs. Such reduction is greater the more homogeneous the participants’ products are. However, it turns out that most of the market structure equilibria consist of mergers among differentiated producers. I find that firms’ strategic behaviour impedes mergers between similar producers, avoiding that input prices fall to their marginal costs. Given that firms can be harmed by rivals’ mergers, through the important reduction in input prices that those trigger, an scenario of preemptive mergers emerges. A brief social welfare analysis is also presented. It is shown that the market structure outcome is never socially optimal, neither in terms of consumer surplus nor social welfare. Nevertheless, the optimum could be achieved if antitrust authorities block some strategic mergers, precisely those involving more than two firms.

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    Bibliographic Info

    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2010-31.

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    Length: 40 pages
    Date of creation: Oct 2010
    Date of revision:
    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasad:2010-31

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    Keywords: mergers; vertical differentiation; unionized oligopoly;

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    1. Berry, Steven & Waldfogel, Joel, 2005. "Product Quality and Market Size," Working Papers 1, Yale University, Department of Economics.
    2. Nilssen, T. & Sorgard, L., 1995. "Sequential Horizontal Mergers," Memorandum 30/1995, Oslo University, Department of Economics.
    3. Gugler, Klaus & Mueller, Dennis C. & Yurtoglu, B. Burcin & Zulehner, Christine, 2003. "The effects of mergers: an international comparison," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 625-653, May.
    4. Scarpa, Carlo, 1998. "Minimum quality standards with more than two firms1," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 665-676, September.
    5. Persson, Lars & Horn, Henrik, 1998. "Endogenous Mergers in Concentrated Markets," Working Paper Series 513, Research Institute of Industrial Economics.
    6. Sonia Oreffice & Climent Quintana, 2009. "Anthropometry and Socioeconomics in the Couple: Evidence from the PSID," Working Papers 2009-22, FEDEA.
    7. 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.
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