Upstream horizontal mergers involving a vertically integrated firm (Q2195242)

This article assumes that there are two final goods, each being produced by an upstream and a downstream firm. It also assumes that the final good by one of the two downstream firms serves as an input in the provision of the other final good by the other downstream firm, which other firm may be alone or merged with the upstream firm in the same good's market. A formal economic model of such a merger has not been developed yet, and filling this gap is the main objective of this paper. The merger makes the independent downstream firm a take-it-or-leave-it offer consisting of an input price and a fixed fee (two-part tariff), and then downstream competition is in quantities (Cournot) takes place. It is thus shown that under constant marginal costs for all firms and observable contracting, a merger always harms consumers. But, under unobservable contracting, a merger may decrease input price and increase consumer surplus if the unintegrated downstream firm is more cost-efficient than the downstream division of the integrated firm. It is also shown that the merger's effect on final-good prices, quantities, and consumer surplus -- under both cases of observable and unobservable contracting -- remains under bargaining the same as under a take-it-or-leave-it offer.