Downstream horizontal mergers and wholesale price discrimination

This paper provides a theoretical model that highlights the fact that market power and/or efficiency gains associated with a downstream merger create asymmetries between merged and non-merged firms, which in turn may lead an upstream supplier to engage in price discrimination. We consider a supply chain with one supplier and three differentiated retailers that compete in a Cournot-Nash fashion. Trade is conducted via observable two-part tariffs. We assume that two retailers decide to merge. Pre-merger, all retailers obtain the same marginal wholesale price since they are identical. Post-merger, the larger merged entity – because it is more cost-efficient and it is endowed with a larger product portfolio – obtains a lower marginal wholesale price than its non-merged rival. Allocative efficiency increases and, different from existing merger theory in one-tier markets, the merger always increases consumer surplus and total welfare regardless of the magnitude of the efficiency gains.