Upstream mergers,downstream mergers,and secret vertical contracts |
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| Institution: | 1. Institute of Economic Research, Hitotsubashi University, Tokyo, Japan;2. Department of Economics, Faculty of Business and Law, Deakin University, Geelong, VIC, Australia;1. University of Bologna, Department of Economics, Piazza Scaravilli 2, Bologna 40126, Italy;2. Lear, Via di Monserrato 48, Rome 00186, Italy;3. Ofcom, Riverside House, 2a Southwark Bridge Road, London SE1 9HA, United Kingdom;4. Deutsches Institut für Wirtschaftsforschung (DIW Berlin), Technische Universität (TU) Berlin, Berlin Centre for Consumer Policies (BCCP), CEPR, and CESIfo. Mohrenstr. 58, Berlin 10117, Germany;5. Lear, Via di Monserrato 48, Rome 00186, Italy |
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| Abstract: | In an industry characterized by secret vertical contracts, we consider a benchmark case where two vertical chains exist, with two upstream manufacturers selling to two downstream retailers, and show that the equilibrium prices are independent of whether upstream or downstream firms have all the bargaining power. We then analyse two alternative mergers, and show that a downstream merger (which gives the downstream monopolist all the bargaining power) is more welfare detrimental than an upstream merger (which gives the bargaining power to the upstream monopolist). We also show that downstream and upstream mergers have the same effects when contracts are observable. |
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