Antitrust & Competition Policy Blog

Mergers and Acquisitions in the Tech Industry: Are They Different?

Mergers and Acquisitions in the Tech Industry: Are They Different?

 

Andrea Asoni

Charles River Associates

Grace Luo

Charles River Associates (CRA) - Competition Practice

Abstract

This Article will compare mergers and acquisitions in the technology industry in the U.S. to mergers and acquisitions in other sectors of the U.S. economy, as well as other countries. This Article will show that the U.S. technology industry is not disproportionately prone to consolidation relative to other important sectors of the U.S. economy. Furthermore, while technology mergers and acquisitions were historically more common in the U.S. than in the rest of the world, other countries are rapidly catching up to the U.S. Lastly, evidence in this Article suggests that the mergers and acquisition activity in the U.S. technology sector is not driven by the largest firms nor by a handful of prolific buyers.

“The Constitutional Moment That Wasn’t: 1912-1914 and the Meaning of the Sherman Act”

See here.

Prior Bad Acts and Merger Review

Prior Bad Acts and Merger Review

 

Michael A. Carrier

Rutgers Law School

Gwendolyn J. Lindsay Cooley

Wisconsin Department of Justice

 

Abstract

Consider a merger of two firms in the pharmaceutical industry. Each has previously engaged in antitrust violations. In considering whether to allow the merger, how much weight should the antitrust agencies give to these prior bad acts? How important should this evidence be to courts? These critical questions have not received sufficient attention.

In the 2010 Horizontal Merger Guidelines, the federal antitrust agencies address collusion, one of the two main types of anticompetitive behavior underlying merger challenges. We support the Guidelines’ attention on this conduct. And we believe that merger enforcement can be improved in this area because the agencies have not been consistent in recognizing prior collusion.

The second main type of prior conduct, unilateral behavior, presents even more uncertainty as the Guidelines do not address it. We offer a framework that suggests considering prior bad acts when (1) the markets are similar, (2) there is a connection between the conduct and the markets covered by the merger, and (3) there is sufficient proof of the prior bad acts.

We supplement our discussion of collusive and unilateral behavior by offering case studies involving mergers for which there was strong evidence that the companies had previously engaged in this conduct. And we conclude by explaining why, in mergers in which prior bad acts counsel agency action, the array of potential relief should include not just a lawsuit to block the merger but also behavioral remedies.

COMIPinDigiMarkts2023 - Call for Abstracts

 2223Jun09:00
- 17:00

Sustainable & Digital Competition on the Merits:  A Comparative and Interdisciplinary Perspective

COMIPinDigiMarkts2023 - Call for Abstracts

Digitalization and sustainability have been identified as a top priority in the EU’s Green Deal to ensure a truly competitive and sustainable digital single market. This strategy not only feeds into the competitiveness of the EU, but it will also ensure the entry and sustainability of a diverse set of market players in the internal market. This is also expected to have a positive spill-over effect to address the ever emerging geopolitical challenges.

Different interests can be balanced and attained only in a freely functioning internal market, where firms compete on the merits, and any anti-competitive effects are addressed in a timely manner. Considering the role of innovation to facilitate a sustainable and digital future, this conference assesses the role of innovation laws, namely, IP and competition laws, to facilitate EU’s green and digital transition.

In light of the multi-disciplinary nature of the debate, the issue merits discussion from a comparative and cross-disciplinary perspective.

To know more and follow the latest updates, have a look at our video and follow the LinkedIn page HERE. 

Faculty of Law

Contact:
Content-related: Kalpana Tyagi
Practicalities: Elke Hundhausen

Venue:
Maastricht University Faculty of Law
Bouillonstraat 1-3, Maastricht

Submit your ABSTRACT here!

Abstracts

Participants are encouraged to submit abstracts dealing with any area of intellectual property and competition law. For a detailed call for papers, please click HERE.

Suggested topics include: 

• Topic 1: Green and Digital Transition 
• Topic 2: How Geopolitical Macro-impediments and Structural Shortcomings Contribute to Monopoly Power?
• Topic 3: Artificial Intelligence, IP and Competition: An Economic Perspective  
• Topic 4: Ascent of AI: Time to (Re-)think Fair Use in Digital Markets?  
• Topic 5: Personal Data, Data Protection and Competition in the Digital Economy 
• Topic 6: Digital Impact on Trademarks, Competition and Distribution 
• Topic 7: Exploitative & Exclusionary Conduct in the Digital World: An Economic Perspective

Kindly submit an abstract of about 1000 words with up to 5 key references. The abstract should also contain the methodology used in the paper. 

Important dates

• Abstract submission deadline: 6th March 2023
• Notification of acceptance: 4th April 2023  
• Submission of final papers: 21st May 2023
• Conference: 22 & 23 June 2023 (online/in-person in Maastricht)

Scientific Committee

• Anselm Kamperman Sanders: Professor IP & Academic Director of the Institute for Globalisation and International Regulation (IGIR), Maastricht University and Deputy Judge, Court of Appeal, Hague
• Caroline Cauffman: Associate Professor, Maastricht University
• Iwan Bos: Associate Professor Industrial Organisation and Competition Economics, Maastricht University
• Kalpana Tyagi: Assistant Professor, IP & Competition Law and Managing Coordinator, The Innovator’s Legal Aid Clinic, Maastricht University
• Maria José Schmidt-Kessen: Assistant Professor, International Business Law, Legal Studies Department, Central European University Vienna, Austria
• Michael Faure: Professor & Academic Director of the Maastricht European Institute for Transnational Legal Research (METRO), Maastricht University
• Niels Philipsen: Associate Professor, Maastricht University and Professor, Rotterdam

Foreclosure and Tunneling with Partial Vertical Ownership

Foreclosure and Tunneling with Partial Vertical Ownership

By:	Matthias Hunold (University of Siegen); Vasilisa Petrishcheva (University of Potsdam)
Abstract:	We demonstrate how the incentives of firms that partially own their suppliers or customers to foreclose rivals depend on how the partial owner can extract profits from the target (tunneling). Compared to a fully vertically integrated firm, a partial owner may obtain only a share of the target’s profit but influence the target’s strategy significantly. We show that the incentives for customer and input foreclosure can be higher, equal, or even lower with partial ownership than with a vertical merger, depending on how the protection of minority shareholders and transfer price regulations affect the scope for profit extraction.
URL:	http://d.repec.org/n?u=RePEc:pot:cepadp:57&r=ind

Acquisitions, Product Variety, and Distribution in the U.S. Craft Beer Industry

Acquisitions, Product Variety, and Distribution in the U.S. Craft Beer Industry

 

Kyle Wilson

Pomona College

Wesley Blundell

California State University, East Bay

Abstract

Though U.S. antitrust authorities have historically focused on prices in merger analyses, there is now growing interest in the impact of mergers on non-price market outcomes. In this paper, we examine the effect of horizontal mergers on product variety in the U.S. beer industry. Upon acquisition by a macrobrewer, a craft brewery reduce its product variety in order to avoid cannibalizing sales of the macrobrewer's existing portfolio. At the same time, acquisition grants the craft brewery access to the macrobrewer's distribution network, facilitating expansion into new markets and thereby increasing the product variety available to consumers in such markets. We compile a unique data set comprising 15,000 breweries, 340,000 products, and 50 mergers in order to empirically assess these effects. Our difference-in-differences analyses provide evidence that acquired craft breweries increase variety available to consumers by expanding into new markets, while reducing the variety of products sold in their existing markets. Further analysis indicates that a substantial portion of this reduction in variety can be attributed to a decreased rate of new product development. Back of the envelope calculations suggest that in aggregate, these acquisitions have a net positive effect on product variety.

Artificial Collusion: Examining Supracompetitive Pricing by Q-learning Algorithms

Artificial Collusion: Examining Supracompetitive Pricing by Q-learning Algorithms

By:	Arnoud V. den Boer (University of Amsterdam); Janusz M. Meylahn (University of Twente); Maarten Pieter Schinkel (University of Amsterdam)
Abstract:	We examine recent claims that a particular Q-learning algorithm used by competitors ‘autonomously’ and systematically learns to collude, resulting in supracompetitive prices and extra profits for the firms sustained by collusive equilibria. A detailed analysis of the inner workings of this algorithm reveals that there is no immediate reason for alarm. We set out what is needed to demonstrate the existence of a colluding price algorithm that does form a threat to competition.
URL:	http://d.repec.org/n?u=RePEc:tin:wpaper:20220067&r=

Too Much Data: Prices and Inefficiencies in Data Markets

Too Much Data: Prices and Inefficiencies in Data Markets

• Daron Acemoglu
• Ali Makhdoumi
• Azarakhsh Malekian
• Asu Ozdaglar

Abstract

When a user shares her data with online platforms, she reveals information about others. In such a setting, externalities depress the price of data because once a user's information is leaked by others, she has less reason to protect her data and privacy. These depressed prices lead to excessive data sharing. We characterize conditions under which shutting down data markets improves welfare. Platform competition does not redress the problem of excessively low data prices and too much data sharing and may further reduce welfare. We propose a scheme based on mediated data sharing that improves efficiency.

Mercatus Center’s 2nd Annual Antitrust Forum: Policy in Transition

Mercatus Center’s 2nd Annual Antitrust Forum: Policy in Transition

Location | Van Metre Hall Auditorium, GMU-Arlington Campus

• January 26, 2023 | 8:45am – 5pm

Register Today

 

The Mercatus Antitrust Forum will bring together leaders from the antitrust community to discuss the state of antitrust enforcement policy, here and abroad, during the second year of the Biden Administration. The Conference will feature presentations by former and current leaders of the Federal Trade Commission and Justice Department Antitrust Division, who will put into perspective the legal and economic policy ramifications of major enforcement, legislative, and policy initiatives in the antitrust space during 2022. Speakers will be leaders of the antitrust bar with diverse political perspectives who have contributed and will continue to contribute substantially to scholarship in this important area.

Agenda

8:45 - 9:00 am: Opening Remarks

 

• Alden Abbott, Conference Host and Senior Research Fellow, Mercatus Center at George Mason University

• Donald J. Boudreaux, Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics

Welcoming Remarks & Introduction of Speaker

• James Cooper, Professor of Law and Director, Program on Economics & Privacy, Antonin Scalia Law School

9:00 - 9:50 am: Keynote | FTC Policymaking, William Kovacic

 

• William Kovacic, Global Competition Professor of Law and Policy; Director, Competition Law Center at George Washington University

Reading Assignments:

• Kovacic, William. "Root and Branch Reconstruction: The Modern Transformation of U.S. Antitrust Law and Policy?" Antitrust Magazine Volume 35 No. 3 - Summer 2021
• Kovacic, William. "The Future Adaptation of the Per Se Rule of Illegality in U.S. Antitrust Law." Columbia Business Law Review Volume No. 1, 2021

9:50 - 10:45 am: Keynote | A Refresh for Antitrust Enforcement, Diana Moss

 

• Diana Moss, President, American Antitrust Institute

Reading Assignment:

• Moss, Diana. "From Competition to Conspiracy: Assessing the Federal Trade Commission’s Merger Policy in the Pharmaceutical Sector." American Antitrust Institute, September 3, 2022.
• Moss, Diana. "Modernizing Competition Policy and Law: The Impact of Marketing Developments on the Legal Treatment of Price Maintenance in the United States, the European Union, and China." Journal of Public Policy & Marketing, April 6, 2022.
• Moss, Diana. "Comments of the AAI in response to the FTC and DOJ RFI on Merger Enforcement." American Antitrust Institute, April 21, 2022.

10:45 - 11:00 am: Break

11:00 - 12:00 pm: International Developments Panel: Updates from Abroad

 

Moderator:

• Douglas Ginsburg, Senior Circuit Judge, Professor of Law, Antonin Scalia Law School

Speakers

• James Rill, Senior Counsel, Baker Botts. Former Assistant Attorney General, U.S. Department of Justice
• Fiona Schaeffer, Partner, Millbank
• Bilal Sayyed, Senior Competition Counsel, TechFreedom. Former Director of the Office of Policy Planning, Federal Trade Commission
• Aurelien Portuese, Director, Antitrust and Innovation Policy, Information Technology and Innovation Foundation

Reading Assignments:

• Portuese, Aurelien. "The Digital Markets Act: A Triumph of Regulation Over Innovation." Information Technology & Innovation Foundation, August 2022.
• Wong-Ervin, Koren. "Extraterritoriality: Approaches Around the World and Model Analysis."Concurrences, 2021.
• Sayyed, Bilal. "Comments of TechFreedom in response to the FTC and DOJ RFI on Merger Enforcement."TechFreedom, April 21, 2021.

12:00 - 12:30 pm: Break

12:30 - 1:30 pm: Fireside Chat | The Future of the FTC, Christine Wilson

 

• Alden Abbott, Senior Research Fellow, Mercatus Center
• Christine Wilson, Commissioner, Federal Trade Commission

Reading Assignments:

• Wilson, Christine. "Marxism and Critical Legal Studies Walk into the FTC: Deconstructing the Worldview of the Neo-Brandeisians ." Federal Trade Commission, April 8, 2022.
• Wilson, Christine. "An Update on FTC Merger Enforcement." Federal Trade Commission, June 15, 2022.

1:30 - 1:45 pm: Break

1:45 - 3:00 pm: Panel | FTC: Rulemaking, Guidelines, and More

 

Moderator:

• Svetlana Gans, Partner, Gibson Dunn

Speakers:

• William Blumenthal, Partner, Sidley Austin LLP
• Koren Wong-Ervin, Antitrust Partner at Axinn, Veltrop, & Harkrider LLP
• Barry Nigro, Partner and Chair of Global Competition Department, Fried Frank
• Maureen Ohlhausen, Chair of Global Antitrust and Competition Practice, Baker Botts

Reading Assignments:

• Ginsburg, Douglas; Wong-Erving, Koren. "Challenging Consummated Mergers Under Section 2." Competition Policy International, May 2020.
• Hoffman, Bruce; Shinn, Garrett. "Self-Preferencing and Antitrust: Harmful Solutions for an Improbable Problem." Competition Policy International, June 15, 2021.
• Ohlhausen, Maureen; Rossen, Ben. "Dead End Road: National Petroleum Refiners Association and FTC “Unfair Methods of Competition” Rulemaking." Baker Botts LLP, April 18, 2022.

3:00 - 4:00 pm: Panel | DOJ: Is Enforcement Policy Really Being Transformed?

 

Moderator:

• Howard Shelanski, Partner, Davis Polk (Antitrust & Competition)

Speakers:

• Juan Artega, Partner, Crowell & Moring, former Deputy Assistant Attorney General for the U.S. Department of Justice Antitrust Division
• Thomas Barnett, Partner and co-chair Antitrust & Competition Law Practice Group, Covington
• Andrew Finch, Co-chair, Antitrust Practice Group, Paul Weiss
• Eric Grannon, Partner, White & Case

Reading Assignments

• Shelanski, Howard. "Judicial Response to the 2010 Horizontal Merger Guidelines." Review of Industrial Organization, November 23, 2020.
• Arteaga, Juan. "Enforcement of Merger Consent Decrees." Global Competition Review, November 8, 2021.

4:00 - 4:45 pm: Government Representative Presentation

Speaker:

• Doha Mekki, Principal Deputy Assistant Attorney General, Department of Justice, Antitrust Section

4:45 - 5:00 pm: Closing Remarks (Alden Abbott)

5:00 - 5:30 pm: Reception

Stay current with economic i

Foreclosure and tunneling with partial vertical ownership

Foreclosure and tunneling with partial vertical ownership

By:	Hunold, Matthias; Petrishcheva, Vasilisa
Abstract:	We study the incentives of firms that hold partial vertical ownership to foreclose rivals. Compared to a full vertical merger, with partial ownership, a firm may obtain only part of the target's profit but may nevertheless be able to influence the target's strategy significantly. The target may be either a supplier or a customer, which opens the scope for either input foreclosure or customer foreclosure. We show that the incentives to foreclose can be higher, equal, or even lower with partial ownership than with a vertical merger, depending on how the protection of minority shareholders and transfer price regulations are specified.
URL:	http://d.repec.org/n?u=RePEc:zbw:dicedp:391&r=

Market Power And Wage Inequality

Market Power And Wage Inequality

By:	Shubhdeep Deb; Jan Eeckhout; Aseem Patel; Lawrence Warren
Abstract:	We propose a theory of how market power affects wage inequality. We ask how goods and labor market power jointly affect the level of wages, the Skill Premium, and wage inequality. We then use detailed microdata from the US Census between 1997 and 2016 to estimate the parameters of labor supply, technology and the market structure. We find that a less competitive market structure lowers the wage level, contributes 7% to the rise in the Skill Premium and accounts for half of the increase in between-establishment wage variance.
URL:	http://d.repec.org/n?u=RePEc:cen:wpaper:22-37&r=

Competition for Loyal Customers

Competition for Loyal Customers

By:	Alexander Usvitskiy (School of Advanced Studies); Dmitry Ryvkin (Department of Economics, Florida State University)
Abstract:	We consider competition for market shares between two firms that make costly investments to attract and retain customers. The value customers bring to the firms in the next period is higher if these customers are loyal, i.e., they remained with the firm. Based on the retention value and on the prior allocation of market shares, the firms' equilibrium investments either preserve the status quo or redistribute customers so that one of the firms gains and the other firm loses its market share. We conduct a laboratory experiment to test the theory and investigate the effects of the relative retention value and the initial state of the market on competition. The initial state of the market is either randomly assigned or endogenously generated through a preliminary contest between the firms. We find that competitors invest more as the customer retention value rises, but only when it is sufficiently high. Investment also rises with initial market share when it is low, but not when it is high. Somewhat surprisingly, we find that, for a given initial market share, investment is lower when this market share is endogenously won than when it is randomly assigned, which we attribute to within-match learning about the competitor's type.
URL:	http://d.repec.org/n?u=RePEc:fsu:wpaper:wp2022_10_01&r=

The Sociology of Cartels

The Sociology of Cartels

By:	Justus Haucap; Christina Heldman
Abstract:	Traditional economic theory of collusion assumed that cartels are inherently unstable, and yet some manage to operate for years or even decades. While the literature has presented several determinants of cartel stability, the vast majority focuses on firms as entities, even though cartels are typically formed between individuals who need to develop structures that allow them to establish trust and ensure cooperation. We analyze 15 German cartels, focusing on the individual participants, the communication and internal structures within the cartels as well as their breakup. Our results indicate that cartel members are highly homogeneous and often rely on existing networks within the industry. Most impressively, only two of the 156 individuals involved in these 15 cartels were female, suggesting that gender also plays a role for cartel formation. We further identify various forms of communication and divisions of responsibilities and show that leniency programs are a powerful tool in breaking up cartels. Based on these results we discuss implications for competition policy and further research.
URL:	http://d.repec.org/n?u=RePEc:ces:ceswps:_9914&r=

Cournot–Bertrand comparison under common ownership in a mixed oligopoly

Cournot–Bertrand comparison under common ownership in a mixed oligopoly

By:	Xu, Lili; Zhang, Yidan; Matsumura, Toshihiro
Abstract:	Price competition is more intense than quantity competition in private oligopolies, wherein all firms are profit maximizers. However, in mixed oligopolies where one state-owned public firm competes with profit-maximizing private firms, price competition may not provide tougher competition than quantity competition. In this study, we introduce common ownership, a distinct feature of recent financial markets, into a mixed oligopoly model and investigate how common ownership affects this ranking. We find that under common ownership, quantity competition is likely to be tougher than price competition. Moreover, we find that common ownership harms welfare regardless of competition mode. Common ownership enhances private firms’ profits under Bertrand competition while these may decline under Cournot competition.
URL:	http://d.repec.org/n?u=RePEc:pra:mprapa:114644&r=

Rising Markups or Changing Technology?

Rising Markups or Changing Technology?

By:	Lucia S. Foster; John C. Haltiwanger; Cody Tuttle
Abstract:	Recent evidence suggests the U.S. business environment is changing, with rising market concentration and markups. The most prominent and extensive evidence backs out firm-level markups from the first-order conditions for variable factors. The markup is identified as the ratio of the variable factor’s output elasticity to its cost share of revenue. Our analysis starts from this indirect approach, but we exploit a long panel of manufacturing establishments to permit output elasticities to vary to a much greater extent - relative to the existing literature - across establishments within the same industry over time. With our more detailed estimates of output elasticities, the measured increase in markups is substantially dampened, if not eliminated, for U.S. manufacturing. As supporting evidence, we relate differences in the markups’ patterns to observable changes in technology (e.g., computer investment per worker, capital intensity, diversification to non-manufacturing), and we find patterns in support of changing technology as the driver of those differences.
URL:	http://d.repec.org/n?u=RePEc:nbr:nberwo:30491&r=

Competition and Quality: Evidence from the Entry of Mobile Network Service

Competition and Quality: Evidence from the Entry of Mobile Network Service

By:	Marc Bourreau (Telecom Paris, Department of Economics and Social Sciences, 19 place Marguerite Perey, 91120 Palaiseau, France); Yutec Sun (CREST-ENSAI, 51 Rue Blaise Pascal, 35170 Bruz, France)
Abstract:	We measure the impact of a new entry on quality supply and welfare in the French mobile service market, where the service providers compete on investing in network resources to meet fast-growing demand for mobile consumption. As network's quality is endogenous to strategic investments, it is unclear whether the entry led the market closer to the socially optimal level of quality supply and welfare. We develop a tractable approach to empirically analyze the dynamic oligopoly game of investment in the network resources in the market where consumers face substantial costs of switching among differentiated services. The counterfactual analysis finds that the quality may be oversupplied in oligopoly competition from the social welfare perspective, while the merger is predicted to yield undersupplied quality.
URL:	http://d.repec.org/n?u=RePEc:net:wpaper:2204&r=

Decentralized Market Power in Credit Markets

Decentralized Market Power in Credit Markets

By:	Silva, Thiago; Souza, Sérgio; Guerra, Solange; Tabak, Benjamin
Abstract:	The literature measures a bank's market power using aggregated data at the bank level. However, market power may be exercised in a decentralized way by each bank branch and for specific banking products. This article proposes a novel methodology for estimating a bank's market power at the branch level in each locality and for each banking product. We find significant heterogeneity in banks' market power by locality and product, even within the same bank. Our results suggest that aggregate measures of bank market power may be misleading and distorted. Accurate quantification of market power requires fine-grained measures, which are essential for enhancing financial regulation and competition.
URL:	http://d.repec.org/n?u=RePEc:pra:mprapa:114766&r=

Rising Markups or Changing Technology?

Rising Markups or Changing Technology?

By:	Lucia Foster; John Haltiwanger; Cody Tuttle
Abstract:	Recent evidence suggests the U.S. business environment is changing, with rising market concentration and markups. The most prominent and extensive evidence backs out firm-level markups from the first-order conditions for variable factors. The markup is identified as the ratio of the variable factor’s output elasticity to its cost share of revenue. Our analysis starts from this indirect approach, but we exploit a long panel of manufacturing establishments to permit output elasticities to vary to a much greater extent - relative to the existing literature - across establishments within the same industry over time. With our more detailed estimates of output elasticities, the measured increase in markups is substantially dampened, if not eliminated, for U.S. manufacturing. As supporting evidence, we relate differences in the markups’ patterns to observable changes in technology (e.g., computer investment per worker, capital intensity, diversification to non-manufacturing), and we find patterns in support of changing technology as the driver of those differences.
URL:	http://d.repec.org/n?u=RePEc:cen:wpaper:22-38&r=

Towards a Technological Overhaul of American Antitrust

Towards a Technological Overhaul of American Antitrust

Ginger Zhe Jin (U Maryland), D Daniel Sokol (USC), and Liad Wagman (ITT)

ABSTRACT

Recent outcry for antitrust reform argues that U.S. markets have become more concentrated, that large firms’ profit margins have increased, and that part of these changes may be attributed to lax antitrust enforcement since the 1960s. While each of these arguments is part of an intense intellectual discourse, politicians have released numerous legislative proposals for what they presumably believe would fix antitrust practices. Despite the clamor, one tangible and factual reason for antitrust reform has not received adequate attention: the informational infrastructure within the U.S. antitrust system massively lags behind the development of the digital economy. That is, the federal antitrust agencies are improperly equipped to organize and operationalize knowledge in enforcement. As a result, the agencies may miss critical warning signs of potential anticompetitive conduct, since they are often unequipped to properly identify issues and do not allocate existing resources effectively (let alone ask Congress for the right kind of resources).

 

 

Tying under Double-Marginalization

Tying under Double-Marginalization

Roman Inderst

Goethe University Frankfurt

Fabian Griem

Goethe University Frankfurt

Greg Shaffer

University of Rochester - Simon Business School

Abstract

In a model of contractual inefficiencies due to double-marginalization, we analyze the practice of tied rebates that incentivizes retailers to purchase multiple products from the same manufacturer. We isolate two opposing effects: a surplus-sharing effect that enhances efficiency and a rent-extraction effect that reduces efficiency. The overall effect is more likely to be negative when the manufacturer has a particularly strong brand for which the retailers alternatives are much inferior. Foreclosure of a more efficient provider of the manufacturers weaker product is not a sufficient
condition for a welfare loss. Our key positive implication relates to the seemingly inefficient introduction of weaker products by the owners of particularly strong brands.