Upstream mergers,downstream mergers,and secret vertical contracts

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.     

Cross-border mergers in vertically related industries

We construct a tractable model of an oligopolistic industry that allows us to capture the role of the vertical structure in the incentives for and implications of cross-border horizontal mergers. We show that vertical integration can increase the gains from cross-border mergers. We also demonstrate how market concentration interacts with costs in the decision of a relatively efficient foreign firm located in one country (source) to merge with a disintegrated or an integrated firm in another country (target) when the industry is vertically related. Absent any merger incentives in an autarkic equilibrium, we demonstrate that vertical integration can raise the incentives for diversification in production and add to the gains from cross-border horizontal mergers. Any additional gain from cross-border horizontal mergers, due to the existence of a vertically integrated production structure, is shown to be sensitive to the relative market concentration across countries. Cross-border mergers will be triggered by a relatively cost-efficient source taking over a disintegrated target when pre-merger competition among the disintegrated firms is relatively intense but, otherwise, the initial target will be a vertically integrated firm.     

Using Market Structure to Regulate a Vertically Integrated Monopolist

A natural monopolist whose cost is private information produces a good which is combined with another good that can be produced by the monopolist or by other firms. The agency that regulates the monopolist can impose any of several different market structures in the industry: integrated monopoly, vertical separation with free entry downstream, or liberalization downstream (both integrated and independent production). When several firms produce downstream, a Cournot quantity-setting game with free entry determines the market price. We derive the optimal contracts to offer the monopolist under all three market structures and examine the influence of downstream cost differences on access prices.We then study the optimal regulatory policy where the regulator can condition the downstream market structure on the monopolist's cost report to the regulator. The optimal regulatory policy awards a monopoly to a low-cost upstream firm, but requires free entry downstream if the monopolist reports high upstream costs. Thus, the choice of market structure is an additional tool to limit rent extraction by the monopolist. Simulation analysis reveals the possibility of significant welfare gains from this additional regulatory tool.     

Local content and emission taxes when the number of foreign firms is endogenous

We consider a vertical relationship where an upstream monopolist supplies input to downstream duopolistic firms. Under the assumption that downstream firms produce under a soft capacity restriction, we show that the balance between price and quantity in downstream firms’ strategy is endogenous. In this way, the monopolist’s charge for input co-determines downstream market conduct. We spell out some consequences of this, for example, that an increase of downstream capacity costs can result in increased output. We discuss other implications in relation to pass-through and incidence of cost changes.     

海外市场需求与跨国垂直并购——基于低端下游企业的视角

本文构建了一个产品从低端到高端分布的Hotelling模型,以探讨我国低端下游企业进行跨国垂直并购的时机选择和决定因素。研究表明,垂直并购国外高端上游企业能实现扩大市场份额、提升产品定位的双重效能。海外市场需求环境对低端下游企业拓展战略起关键性作用。在正常需求条件下,与直接出口及先并购国内上游企业再出口两种模式相比,跨国垂直并购并非最优选择。在遭受负向需求冲击时,国外上游企业生产成本的大幅上升以及国外下游竞争对手品牌价值的下降给跨国垂直并购带来了契机,此时在技术密集度较高的上游产业进行跨国垂直并购成为国内低端下游企业的最优选择。如果并购能实现足够大的品牌价值效应,还会改善被并购企业所在国的社会福利水平。     

HORIZONTAL MERGERS IN A DIFFERENTIATED COURNOT OLIGOPOLY

Using a standard differentiated goods quantity competition setting, we show three facts about horizontal two‐firm mergers that are not true for a homogeneous goods Cournot market. First, merger of two firms is profitable for the merging firms provided that goods are sufficiently distant substitutes. Second, merging of two firms can lead to more two‐firm mergers. Third, an initially non‐profitable two‐firm merger can occur in anticipation of subsequent mergers. These facts imply that mergers are more likely to occur in differentiated goods markets than in homogeneous goods markets.     

Does FDI Facilitate Domestic Entry? Evidence from the Czech Republic

This paper analyzes the impact of FDI on domestic firm entry and firm size distributions in the Czech Republic during 1994–2000. We find that larger foreign presence stimulates the entry of domestic firms within the same industry, indicating the existence of positive horizontal spillovers from FDI. We also find evidence of significant vertical entry spillovers—FDI in downstream (upstream) industries initiates entry in upstream (downstream) sectors. Our results also show that entry spillovers through vertical linkages are stronger than horizontal spillovers and that while service industries benefit from both horizontal and vertical spillovers, manufacturing industries do not experience significant positive entry spillovers of any kind. We also find that country of origin of FDI matters—horizontal spillovers are driven by FDI from the EU countries. The right skewness of the firm size distributions in industries without FDI further emphasizes an important role of FDI presence for overall industry dynamics.     

Modelling and predicting the competitive effects of vertical mergers: The bargaining leverage over rivals effect

A new competitive effect of vertical mergers, based on the Nash bargaining model, has begun to play an important role in antitrust authorities’ evaluations of vertical mergers in the United States, Canada and abroad. The key idea is that a vertical merger will increase the bargaining leverage of the merged firm over its downstream rivals. Its bargaining leverage increases because it now takes into account the additional profit that its own downstream division will earn if it withholds inputs from downstream rivals, which changes its threat point in the bargaining game with downstream rivals. Consequently, the merged firm can increase the price that it charges rival downstream firms for inputs. One strong appeal of this theory is that it provides a simple and very intuitive formula to measure the upward pricing pressure caused by a vertical merger due to changes in bargaining leverage, based on variables whose values can generally be estimated using available data. This article describes this new competitive effect, which will be called the bargaining leverage over rivals (BLR) effect, and derives the upward pricing pressure formula. It also explains why this new competitive effect is distinct from the older raising rivals’ costs (RRC) effect that has been widely discussed in the economics literature, and discusses the relationship between the two different effects.     

On intrabrand and interbrand competition: The strategic role of fees and royalties

We examine oligopolistic markets with both intrabrand and interbrand competition. We characterize equilibrium contracts involving a royalty (or wholesale price) and a fee when each upstream firm contracts with multiple downstream firms. Royalties control competition between own downstream firms at the expense of making them passive against rivals. When the number of downstream firms is endogenous, each upstream firm chooses to have only one downstream firm. This result is in sharp contrast to previous literature where competitors benefit by having a larger number of independent downstream firms under only fixed fee payments. We discuss why allowing upstream firms to charge per-unit payments in addition to fixed fees dramatically alters their strategic incentives.     

Merger Waves and Firm Growth: Contemporary Historical Evidence

This article presents the outcomes of an evaluation of the impact of the series of mergers of the local exchange companies that have taken place between 1988 and 2001 on an important measure of performance of the firms undergoing the mergers. The analysis reveals that after firms have undertaken one merger they experience little or no growth after such mergers, but the impact of second mergers on firm growth have been negative. If an important motive in undertaking mergers has been to enhance firm growth, then the merger waves that have been approved and consummated have led to performance declines. The impacts of the merger wave on the growth of the telecommunications sector firms have been negative.     

Brotherhood of competition: Foreign Direct Investment and domestic mergers

We examine the effects of mergers on Foreign Direct Investment (FDI), and on shaping national policies regarding FDI. In this work we develop a partial equilibrium model of an oligopolistic industry in which a number of domestic and foreign firms compete in the market for a homogeneous good in a host country. It is assumed that the number of foreign firms is endogenous and can be affected by the government policy in the host country. The government sets the policy (subsidies) to maximise social welfare. We allow domestic mergers. Our main results suggest that when the host country government imposes discriminatory lump-sum subsidy in favor of foreign firms, a merger of domestic firms will increase the number of FDI if the subsidy level is exogenous. With an endogenous level of subsidy, a merger of domestic firms will decrease (increase) the welfare if the domestic firms are more (less) efficient.     

On Mergers and Agglomeration

We formulate a model of mergers and acquisitions assuming a monopolistic competitive industry that exhibits agglomeration economies. We provide the conditions for the existence of a non‐trivial Nash equilibrium in the acquisition market at which the most productive firm acquires a range of less‐productive firms. Most importantly, we show that domestic merger and acquisition activities are international trade promotionary. We also show that such types of mergers and acquisition will improve the competitive position of foreign firms leading to an increase in their market share. In addition, domestic mergers and acquisitions will increase the number of imported varieties.     

The merger paradox in a mixed oligopoly

This paper examines the set of surplus maximizing mergers in a model of mixed oligopoly. The presence of a welfare maximizing public firm reduces the set of mergers for which two private firms can profitably merge. When a public firm and private firm merge, the changes in welfare and profit depend on the resulting extent of private ownership in the newly merged firm. When the government sets that share to maximize post merger welfare as assumed in the privatization literature, the merger paradox will often remain and the merger will not take place. Yet, we show there always exists scope for mergers that increase profit and increase (if not maximize) welfare. Interestingly, these mergers often include complete privatization.     

Ranking the optimum tariff and the maximum revenue tariff in vertically related markets

This paper firstly shows that in a vertically related industry with either domestic upstream monopolist or foreign upstream monopolist, when the upstream firm adopts uniform input pricing, the optimum-welfare tariff is higher than the maximum-revenue tariff, if the number of foreign competitors is sufficiently large. Secondly, when domestic upstream monopolist adopts discriminatory input pricing, the maximum-revenue tariff is higher than the optimum-welfare tariff. Thirdly, when foreign upstream monopolist adopts discriminatory input pricing, the optimum-welfare tariff will exceed the maximum-revenue tariff if the sizes of domestic and foreign firms become more unequally distributed.     

Privatization and Strategic Mergers across Borders

We present a theoretical model to capture the role of privatization in the incentives for and implications of cross‐border horizontal mergers. Absent any merger incentives in an autarkic equilibrium, we show that a decrease in the degree of privatization will lower the incentives for diversification of international production. The incentives for diversification for any given degree of privatization will fall when the private and public firms are allowed to move sequentially rather than simultaneously. The presence of the public firm also introduces a new source of asymmetry in the incentives for cross‐border mergers: a reduction in the degree of privatization at home will dampen the potential gains from a take‐over of a home firm by a foreign firm but magnify the potential gains from a take‐over of a foreign firm by a home firm.     

Incentives for Discrimination when Upstream Monopolists Participate in Downstream Markets

A regulated upstream monopolist supplies an essential input to firms in a downstream market. If an upstream monopolist vertically integrates downstream, non-price discrimination becomes a concern. Discrimination always arises in equilibrium when the vertically integrated provider (VIP) is no less efficient than its rivals in the downstream market, but it does not always arise when the VIP is less efficient than its rivals. Numerical simulations that parameterize the regulator's ability to monitor discrimination in the case of long-distance telephone service in the U.S. reveal that pronounced efficiency differentials are required for the incentive to discriminate not to arise in equilibrium.     

Price competition and quality differentiation with multiproduct firms

This paper examines a two-stage competition where firms simultaneously choose the number of products and qualities in the first stage, and then compete in prices. It is shown that a monopolist must sell a single product. In addition, in any equilibrium of multiproduct duopoly, there are segmented patterns of quality differentiation. Entangled configurations never emerge because each firm has an incentive to reduce the number of products facing direct competition with its rival. This result contrasts sharply with the equilibrium of non-segmented quality differentiation when firms compete in quantities. Furthermore, we find that the high-quality firm never offers more products than the low-quality firm, and quality differentiation between firms is greater than that within a firm.     

Vertical R&D Spillovers,Cooperation, Market Structure,and Innovation

This paper studies vertical R&D spillovers between upstream and downstream firms. The model incorporates two vertically related industries, with horizontal spillovers within each industry and vertical spillovers between the two industries. Four types of R&D cooperation are studied: no cooperation, horizontal cooperation, vertical cooperation, and simultaneous horizontal and vertical cooperation. Vertical spillovers always increase R&D and welfare, while horizontal spillovers may increase or decrease them. The comparison of cooperative settings in terms of R&D shows that no setting uniformly dominates the others. Which type of cooperation yields more R&D depends on horizontal and vertical spillovers, and market structure. The ranking of cooperative structures hinges on the signs and magnitudes of three "competitive externalities" (vertical, horizontal, and diagonal) which capture the effect of the R&D of a firm on the profits of other firms. One of the basic results of the strategic investment literature is that cooperation between competitors decreases R&D when horizontal spillovers are low; the model shows that this result does not necessarily hold when vertical spillovers are sufficiently high, and/or when horizontal cooperation is combined with vertical cooperation.     

The closed‐loop effect and the profitability of horizontal mergers

Abstract.  We study the profitability of horizontal mergers in a dynamic competition context with sticky prices. It is shown that, when firms use open‐loop strategies, a merger is profitable only if the share of the market that merges is significant enough. In the case where firms use closed‐loop strategies we provide a method to conduct analytically the study of the profitability of horizontal mergers. We first prove the existence of an equilibrium of the game when a subset of firms merges. When firms use feedback strategies, mergers are profitable even when the share of the market that merges is arbitrarily small. JEL Classification:D4, L13     

BARGAINING FAILURES AND MERGER POLICY

We study approval rules in a model where horizontal merger proposals arise endogenously as the outcome of negotiations among the firms in the industry. We make two main points. First, relatively inefficient merger proposals succeed with positive probability. That is, the negotiation process may result in a particular merger agreement despite the existence of an alternative one that would generate higher profits and higher consumer surplus. Second, the antitrust authority should optimally commit to an approval rule that is more stringent for all mergers than the optimal ex post rule.