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Bargining, Bundling, and Clout: The Portfolio Effects of Horizontal Mergers

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Listed:
  • Daniel P. O'Brien

    () (Federal Trade Commission)

  • Greg Shaffer

    () (University of Rochester)

Abstract

We examine the output and profit effects of horizontal mergers between differentiated upstream firms in an intermediate-goods market served by a downstream monopolist. If the merged firm can bundle, transfer pricing is efficient before and after the merger. Absent cost efficiencies, consumer and total welfare do not change. If the merged firm cannot bundle and its bargaining power is sufficiently high, transfer pricing is inefficient after the merger. Absent cost efficiencies, welfare typically falls. We evaluate the profit effects of mergers for the case of two-part tariff contracts. Rival firms gain (lose) from mergers that raise (lower) downstream prices. Contrary to conventional wisdom, a merger that harms the retailer may increase welfare.

Suggested Citation

  • Daniel P. O'Brien & Greg Shaffer, 2005. "Bargining, Bundling, and Clout: The Portfolio Effects of Horizontal Mergers," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 573-595, Autumn.
  • Handle: RePEc:rje:randje:v:36:y:2005:3:p:573-595
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    Cited by:

    1. Ioannis N. Pinopoulos, 2017. "Upstream horizontal mergers and vertical integration," Discussion Paper Series 2017_07, Department of Economics, University of Macedonia, revised Aug 2017.
    2. Gautam Gowrisankaran & Aviv Nevo & Robert Town, 2015. "Mergers When Prices Are Negotiated: Evidence from the Hospital Industry," American Economic Review, American Economic Association, vol. 105(1), pages 172-203, January.
    3. Nilsen, Øivind Anti & Sørgard, Lars & Ulsaker, Simen A., 2016. "Upstream merger in a successive oligopoly: Who pays the price?," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 143-172.
    4. Gangshu (George) Cai & Yue Dai & Sean X. Zhou, 2012. "Exclusive Channels and Revenue Sharing in a Complementary Goods Market," Marketing Science, INFORMS, vol. 31(1), pages 172-187, January.
    5. Symeonidis, George, 2010. "Downstream merger and welfare in a bilateral oligopoly," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 230-243, May.
    6. Qi Feng & Lauren Xiaoyuan Lu, 2012. "The Strategic Perils of Low Cost Outsourcing," Management Science, INFORMS, vol. 58(6), pages 1196-1210, June.
    7. Steven Brakman & Harry Garretsen & Charles van Marrewijk, 2015. "The Location of Cross-Border Mergers & Acquisitions in the USA," CESifo Working Paper Series 5331, CESifo Group Munich.
    8. George Symeonidis, 2008. "Downstream Competition, Bargaining, and Welfare," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(1), pages 247-270, 03.
    9. Ioannis Pinopoulos, 2016. "Vertical integration and upstream horizontal mergers," Discussion Paper Series 2016_03, Department of Economics, University of Macedonia, revised Nov 2016.

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