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Upstream Mergers, Downstream Mergers, and Secret Vertical Contracts

Author

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  • Fumagalli, C.
  • Motta, M.

Abstract

In an industry characterised by secret vertical contracts, we consider a benchmark case where two vertical chains exist, with two upstream manufacturers selling to two downstream retailers, and show that the equilibrium prices are independent of whether upstream or downstream firms have all the bargaining power. We then analyse two alternative mergers, and show that a downstream merger (which gives the downstream monopolist all the bargaining power) is more welfare detrimental than an upstream merger (which gives the bargaining power to the upstream monopolist). We also show that downstream and upstream mergers have the same effects when contracts are observable.

Suggested Citation

  • Fumagalli, C. & Motta, M., 1999. "Upstream Mergers, Downstream Mergers, and Secret Vertical Contracts," Economics Working Papers eco99/38, European University Institute.
    • Handle: RePEc:eui:euiwps:eco99/38
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    References listed on IDEAS

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    1. 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.
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    10. Greg Shaffer, 1991. "Slotting Allowances and Resale Price Maintenance: A Comparison of Facilitating Practices," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 120-135, Spring.
    11. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-265, March.
    12. 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.
    13. Paul Dobson & Michael Waterson, 1999. "Retailer power: recent developments and policy implications," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 14(28), pages 134-164.
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    Citations

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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. Aditya Bhattacharjea & Srishti Gupta, 2022. "Alternative Forms of Buyer Power in a Vertical Duopoly: Implications for profits and consumer welfare," Working papers 326, Centre for Development Economics, Delhi School of Economics.
    3. Marie-Laure Allain & Saïd Souam, 2004. "Concentration horizontale et relations verticales," Working Papers hal-00242914, HAL.
    4. Ramon Fauli-Oller & Borja Mesa-Sánchez, 2015. "Losses from Horizontal Merger: an Extension to a Successive Oligopoly Model with Product Differentiation," Manchester School, University of Manchester, vol. 83(5), pages 604-621, September.
    5. Pavan Manocha & Jagjit Singh Srai, 2020. "Exploring Environmental Supply Chain Innovation in M&A," Sustainability, MDPI, vol. 12(23), pages 1-15, December.
    6. Lan, Yanfei & Yan, Haikuan & Ren, Da & Guo, Rui, 2019. "Merger strategies in a supply chain with asymmetric capital-constrained retailers upon market power dependent trade credit," Omega, Elsevier, vol. 83(C), pages 299-318.
    7. Ioannis N. Pinopoulos, 2020. "Upstream horizontal mergers involving a vertically integrated firm," Journal of Economics, Springer, vol. 130(1), pages 67-83, June.
    8. Symeonidis, George, 2010. "Downstream merger and welfare in a bilateral oligopoly," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 230-243, May.
    9. Zhu, Jing & Boyaci, Tamer & Ray, Saibal, 2016. "Effects of upstream and downstream mergers on supply chain profitability," European Journal of Operational Research, Elsevier, vol. 249(1), pages 131-143.
    10. Symeonidis, George, 2010. "Downstream merger and welfare in a bilateral oligopoly," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 230-243, May.
    11. Shu-Hua Chang, 2005. "Upstream Mergers, Downstream Mergers, and Unionized Oligopoly," The American Economist, Sage Publications, vol. 49(2), pages 67-74, October.

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    More about this item

    Keywords

    MERGERS ; VERTICAL INTEGRATION ; MARKET STRUCTURE;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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