Bargaining, vertical mergers and entry
AbstractThis paper analyzes vertical integration incentives in a bilaterally duopolistic industry where upstream producers bargain with downstream retailers on terms of supply. In the applied framework integration does not affect the total output produced, but it affects the distribution of rents among players. Vertical integration incentives depend on the strength of substitutability or complementarity between products and the shape of the unit cost function. I demonstrate furthermore that in contrast to the widely prevailing view in competition policy, vertical integration can under particular circumstances convey more bargaining power to the merged entity than a horizontal merger to monopoly. The model is applied to analyze strategic merger incentives to influence entry decisions. Mergers can facilitate and deter entry. While horizontal mergers to deter entry are never profitable, firms on different market levels may strategically choose to integrate vertically to keep a potential entrant out of the market. I provide conditions for such entry-deterring vertical mergers to occur. --
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Bibliographic InfoPaper provided by Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) in its series DICE Discussion Papers with number 61.
Date of creation: 2012
Date of revision:
Bargaining; Vertical Mergers; Entry;
Find related papers by JEL classification:
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-14 (All new papers)
- NEP-BEC-2012-07-14 (Business Economics)
- NEP-COM-2012-07-14 (Industrial Competition)
- NEP-IND-2012-07-14 (Industrial Organization)
- NEP-MIC-2012-07-14 (Microeconomics)
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