Thursday, January 14, 2010
Posted by D. Daniel Sokol
Johan Hombert (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique), Jérôme Pouyet (Department of Economics, Ecole Polytechnique - CNRS), and Nicolas Schutz (Department of Economics, Ecole Polytechnique - CNRS examineAnticompetitive vertical mergers waves.
ABSTRACT: This paper develops an equilibrium model of vertical mergers. We show that competition on an upstream market between integrated firms only is less intense than in the presence of unintegrated upstream firms. Indeed, when an integrated firm supplies the upstream market, it becomes a soft downstream competitor to preserve its upstream profits. This benefits other integrated firms, which may therefore choose not to cut prices on the upstream market. This mechanism generates waves of vertical mergers in which every upstream firm integrates with a downstream firm, and the remaining unintegrated downstream firms obtain the input at a high upstream price. We show that these anticompetitive vertical mergers waves are more likely when downstream competition is fiercer.