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Vertical integration and upstream horizontal mergers

Author

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  • Ioannis Pinopoulos

    (Department of Economics, University of Macedonia)

Abstract

In this paper, we study upstream horizontal mergers in vertically related markets. A key aspect of our analysis is that one of the merging parties is a vertically integrated firm. We consider a two-tier market consisting of two competing vertical chains, with one upstream and one downstream firm in each chain. We assume that one vertical chain is vertically integrated whereas the other chain is vertically separated. We also assume that the vertically integrated chain is more cost-efficient in its downstream operations than the independent downstream firm. We show that a horizontal merger between the vertically integrated firm and the independent upstream supplier will increase the equilibrium input price and reduce both consumer and total welfare. When an upstream competitive fringe exists, however, the merger still decreases consumer surplus but it may increase total welfare. The latter finding is important since it implies that whether antitrust authorities favor a consumer or total welfare objective can lead to very different conclusions regarding the merger’s desirability.

Suggested Citation

  • Ioannis Pinopoulos, 2016. "Vertical integration and upstream horizontal mergers," Discussion Paper Series 2016_03, Department of Economics, University of Macedonia, revised Nov 2016.
    • Handle: RePEc:mcd:mcddps:2016_03
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    References listed on IDEAS

    as
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    3. Chrysovalantou Milliou & Apostolis Pavlou, 2013. "Upstream Mergers, Downstream Competition, and R&D Investments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(4), pages 787-809, December.
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    More about this item

    Keywords

    Vertical relations; vertical integration; horizontal mergers; welfare.;
    All these keywords.

    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
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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