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Concentration-Based Merger Tests and Vertical Market Structure


  • Joshua S. Gans


In this article I derive a concentration measure for markets with multiple vertical segments. I derive the measure using a model of vertical contracting in which upstream and downstream firms bargain bilaterally and may be integrated. The resulting vertical Hirschman-Herfindahl index provides a measure of the degree of distortion in the vertical chain as a result of both the horizontal concentration in a segment and the degree of its vertical integration. This measure distinguishes between the differing competitive impacts of upstream and downstream competition, establishes the relative size of integrated firms in each segment, and provides a quantitative threshold test for vertical mergers.

Suggested Citation

  • Joshua S. Gans, 2007. "Concentration-Based Merger Tests and Vertical Market Structure," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 661-681.
  • Handle: RePEc:ucp:jlawec:v:50:y:2007:p:661-681
    DOI: 10.1086/519819

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    References listed on IDEAS

    1. Catherine C. de Fontenay & Joshua S. Gans, 2005. "Vertical Integration in the Presence of Upstream Competition," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 544-572, Autumn.
    2. Patrick Rey & Thibaud Vergé, 2004. "Bilateral Control with Vertical Contracts," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 728-746, Winter.
    3. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 345-356.
    4. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn.
    5. Joshua S. Gans, 2007. "VERTICAL CONTRACTING WHEN COMPETITION FOR ORDERS PRECEDES PROCUREMENT -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 55(2), pages 325-346, June.
    6. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
    7. McAfee, R Preston & Williams, Michael A, 1992. "Horizontal Mergers and Antitrust Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 181-187, June.
    8. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-230, March.
    9. Ilya Segal & Michael D. Whinston, 2003. "Robust Predictions for Bilateral Contracting with Externalities," Econometrica, Econometric Society, vol. 71(3), pages 757-791, May.
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    Cited by:

    1. Shi, Guanming & Stiegert, Kyle & Chavas, Jean Paul, 2010. "An Analysis of Pricing in Horizontal and Vertical Markets: The Case of the Cottonseed Market," Working Papers 201439, University of Wisconsin-Madison, Department of Agricultural and Applied Economics, Food System Research Group.
    2. Shi, Guanming & Chavas, Jean-Paul, 2009. "On Pricing and Vertical Organization of Differentiated Products: The Case of Soybean Seed Industry," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49186, Agricultural and Applied Economics Association.
    3. Simon Loertscher & Markus Reisinger, 2014. "Market structure and the competitive effects of vertical integration," RAND Journal of Economics, RAND Corporation, vol. 45(3), pages 471-494, September.
    4. Kenneth Hendricks & R. Preston Mcafee, 2010. "A Theory Of Bilateral Oligopoly," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 391-414, April.
    5. Arijit Mukherjee & Udo Broll & Soma Mukherjee, 2009. "The welfare effects of entry: the role of the input market," Journal of Economics, Springer, vol. 98(3), pages 189-201, December.
    6. Herbert Hovenkamp, 2011. "Harm to Competition Under the 2010 Horizontal Merger Guidelines," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 39(1), pages 3-18, August.
    7. Roman Inderst & Tommaso Valletti, 2009. "Indirect versus Direct Constraints in Markets with Vertical Integration," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(3), pages 527-546, September.

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