Thursday, July 9, 2020
We study the effects of a vertical merger in a setting with a single upstream supplier of a critical input and two downstream customers which compete with each other. Initially, the upstream supplier first announces prices, then the two downstream customers announce their retail prices. We find that after the vertical merger, the merged firm will prefer to announce its upstream and downstream prices simultaneously as a first mover. The remaining downstream competitor then announces its price. We preform Monte Carlo simulations about the competitive effects of the vertical merger for the cases of linear and logit demands. We find that the integrated firm always lowers its downstream price compared to pre-merger levels. The upstream price paid by the unintegrated downstream firm can either rise or fall due to the merger. Prices tend to rise when the diversion ratio from the rival downstream firm to the merged firm is high. When it is low, they fall. The well-known vertical GUPPI approach to scoring a vertical merger does not perform well as a guide to the likely price effects of the merger.