Merger Review for Markets with Buyer Power

Abstract

We analyze the competitive effects of mergers in markets with buyer power. Using mechanism design arguments, we show that without cost synergies, mergers harm buyers, regardless of buyer power. However, buyer power mitigates the harm to a buyer from a merger of symmetric suppliers. With buyer power, a merger increases incentives for entry, increases investment incentives for rivals, and can increase investment incentives for merging parties. Because buyer power reduces the profitability of a merger, it increases the profitability of perfect collusion relative to a merger. Cost synergies can eliminate merger harm, but also render otherwise profitable mergers unprofitable.

Mix‐and‐match divestitures and merger harm

“…Our model is one of incomplete information, where suppliers costs are their own private information. It extends the procurement model of Loertscher and Marx (2019b) to accommodate divestiture.…”

“…As we show, if a merger-plus-divestiture results in a better distribution of the lowest cost, then a buyer without power benefits as long as there is sufficient outside competition. To describe the effects of a merger-plus-divestiture on the distribution of the lowest cost of the pre-merger merging suppliers versus the newly created suppliers following a merger-plus-divestiture, we use the notion of a neutral for rivals spread (see Loertscher and Marx, 2019a). A pair of distributions ðG 1 ; G 2 Þ is said to be a neutral for rivals spread of G if G 1 is better than G and G 2 is worse than G in an FOSD sense, and if the distribution of the minimum of two draws from G, given by 1 À ð1 À GðcÞÞ 2 , is the same as the distribution of the minimum of one draw from G 1 and one draw from G 2 , given by 1 À ð1 À G 1 ðcÞÞð1 À G 2 ðcÞÞ .…”

“…Analysing coordinated effects in a procurement setting, 7 Loertscher and Marx (2019a) show that a buyer is harmed by a merger-plus-divestiture that transforms two initially symmetric suppliers into two new suppliers whose distributions form a competitively neutral spread of the original distribution. 8 As we show here, a merger-plus-divestiture that mixes and matches components in a way that combines the lower-cost components into one post-merger supplier and the higher-cost components into another post-merger supplier tends to be better for the buyer than a competitively neutral spread.…”

“…Some papers have raised concerns that certain divestitures can exacerbate concerns of coordinated effects, for example if the firms in a market following a merger-plus-divestiture are more symmetric with one another than before the transaction (see Compte et al, 2002;Vasconcelos, 2005;Loertscher and Marx, 2019a). Our focus here is on unilateral rather than coordinated effects.…”

Mergers and Innovation Portfolios

“…Markets in which buyers have market power can be quite distinct Loertscher and Marx (2018). show that in procurement markets a merger increases the incentives to invest of the non-merging suppliers and may also raise the incentives to invest of the merging firms.…”