Horizontal Mergers in Multitier Decentralized Supply Chains

Abstract

T he well-known economic theory predicts that consumer price will fall after a horizontal merger when the amount of marginal cost reduction from operating synergies exceeds the premerger markup of a merging firm. However, when a horizontal merger occurs in a multitier decentralized supply chain where a finite number of firms compete at each tier, we show that this result holds only when a merger occurs at the tier that acts as the leader in the supply chain. In this supply chain, a horizontal merger at any other tier will decrease consumer price when the cost reduction exceeds a certain threshold that is larger than the premerger markup. Moreover, this threshold is increasing as the supply chain gets longer and can be substantially larger than the premerger markup. When accounting for subsequent entry after a merger in long-run equilibrium, contrary to a common belief, a larger synergy from a merger does not necessarily benefit consumers more.

Effects of upstream and downstream mergers on supply chain profitability

“…The Cournot and Bertrand models are complementary in the sense that Cournot model is adequate if products are homogeneous or undifferentiated (e.g., products oil, gas and electricity, see Budzinski & Ruhmer 2010), while Bertrand model is more suitable for consumer goods markets, where customers have preferences and retailers sell differentiated competing products. Different from the results of Cho (2013) that the competition effect alone does not justify a profitable upstream or downstream merger, we show that merging firms always benefit from increased market power and earn higher profits. In addition, due to the limitation of Cournot model, Cho (2013) indicates that no matter at what level a merger occurs, all of the firms in other tiers will react in the same way.…”

“…Researchers in the operations and supply chain management areas are usually more interested in the role of cooperation among competing agents. Although a few papers address the effects of a merger in a supply chain context, such as Fumagalli and Motta (2001), Inderst and Shaffer (2007), and Cho (2013), they either consider a duopoly model or a single product setting. To the best of our knowledge, this paper is the first to analyze the effect of horizontal mergers at both upstream and downstream levels using the Bertrand oligopoly model in a supply chain environment.…”

“…In a recent work, Cho (2013) examines the effects of merger in a two-tier supply chain under Cournot competition. The Cournot and Bertrand models are complementary in the sense that Cournot model is adequate if products are homogeneous or undifferentiated (e.g., products oil, gas and electricity, see Budzinski & Ruhmer 2010), while Bertrand model is more suitable for consumer goods markets, where customers have preferences and retailers sell differentiated competing products.…”

Network Formation with Local Complements and Global Substitutes: The Case of R&D Networks

“…Farrell and Shapiro, 1990;Cho, 2013;Kim 67 For this purpose we use the same graph simulation algorithm that is part of the DMH estimation algorithm, which is explained in greater detail in supplementary Appendix G.1. 68 We also tried 1.5 × 10 4 and 2 × 10 4 iterations and get similar results.…”

Vertical Bargaining and Retail Competition: What Drives Countervailing Power?

“…Antelo and Bru (2006) analysed coalitions between upstream firms which contract with retailers over non-linear agreements. Finally, Cho (2014) and Gosh, Morita and Wang (2014) investigated the e↵ects of mergers or entry in a two-tier Cournot oligopoly with a decentralized upstream marketplace. In order to study the e↵ects of a change in the number of upstream firms, m, on our equilibrium, we need to consider how this would impact both conduct parameters.…”