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Vertical mergers in procurement markets

Listed author(s):
  • Thomas, Charles J.

This paper uses computational methods that reveal ambiguous strategic effects of vertical mergers in a duopoly setting featuring incomplete information about sellers' costs, and differences in sellers' productive capabilities. First, vertical mergers can be jointly unprofitable. Second, the buyer's preferred merger partner is almost always the seller with lower expected costs, and is typically the larger seller. Third, vertical mergers always reduce the unintegrated seller's profits, sometimes dramatically. Finally, vertical mergers can increase total welfare. Some of the results contrast qualitatively with unambiguous findings from models with symmetric sellers, which suggests that caution should be used in drawing general inferences from those models.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167-7187(10)00064-0
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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 29 (2011)
Issue (Month): 2 (March)
Pages: 200-209

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Handle: RePEc:eee:indorg:v:29:y:2011:i:2:p:200-209
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  7. Rey, Patrick & Tirole, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005.
  8. Waehrer, Keith, 1999. "Asymmetric private values auctions with application to joint bidding and mergers," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 437-452, April.
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  17. Lee, Joon-Suk, 2008. "Favoritism in asymmetric procurement auctions," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1407-1424, November.
  18. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 345-356.
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