Welfare Effects of Downstream Mergers and Upstream Market Concentration

Abstract

We consider a dominant upstream …rm selling an input to several downstream …rms through observable, non-discriminatory two-part tari¤ contracts. Downstream …rms can alternatively buy the input from a less e¢cient source of supply. In this setting we analyze the relationship between the competitive e¤ects of downstream mergers and the level of concentration at the upstream level. We show that a downstream merger leads to lower wholesale prices. This translates into lower …nal prices only when the upstream market is su¢ciently concentrated. In this case, a downstream merger tends to be both procompetitive and pro…table.

Manufacturers Mergers and Product Variety in Vertically Related Markets

“…In Section 3, we perform the equilibrium analysis. In Section 4, we examine the implications 8 Berry and Waldfogel (2001), von Ungern-Sternberg (1996), Dobson and Waterson, (1997), Inderst and Wey (2003) and ( 2011), Lommerud et al (2005), Fauli-Oller andBru (2008), Symeonidis (2008), Fauli-Oller et al (2011), Faulí-Oller (2008), Faulí-Oller and Sandonís (2014 and Inderst and Sha¤er (2007), study, instead, downstream mergers. 9 In a related paper, Milliou, Petrakis and Sloev (2010), similarly to us, endogenize upstream product innovation.…”

Upstream Incentives to Encourage Downstream Competition in a Vertically Separated Industry

“…This optimal contract was obtained inFaulí-Oller and Sandonís (2014). They use the same framework to discuss the pro…tability and welfare e¤ects of downstream mergers.6 This argument is also used inSen and Tauman (2007) to prove that with an auction plus royalty contract, a cost reducing innovation would be sold to all …rms by an outsider patentee, and also by Faulí-Oller,González and Sandonís (2014) to show that the same result holds for the case of di¤erentiated goods and for both an outsider and an insider patentee.…”