Bargaining, vertical mergers and entry

This paper analyzes vertical integration incentives in a bilaterally duopolistic industry where upstream producers bargain with downstream retailers on terms of supply. In the applied framework integration does not affect the total output produced, but it affects the distribution of rents among players. Vertical integration incentives depend on the strength of substitutability or complementarity between products and the shape of the unit cost function. I demonstrate furthermore that in contrast to the widely prevailing view in competition policy, vertical integration can under particular circumstances convey more bargaining power to the merged entity than a horizontal merger to monopoly. The model is applied to analyze strategic merger incentives to influence entry decisions. Mergers can facilitate and deter entry. While horizontal mergers to deter entry are never profitable, firms on different market levels may strategically choose to integrate vertically to keep a potential entrant out of the market. I provide conditions for such entry-deterring vertical mergers to occur.

[1]  Faruk Gul Bargaining Foundations of Shapley Value , 1989 .

[2]  Vertical Foreclosure versus Downstream Competition with Capital Precommitment , 2004 .

[3]  Fatima Lambarraa,et al.  On the Norms of Charitable Giving in Islam: A Field Experiment , 2012 .

[4]  J. Bijman,et al.  Erim Report Series Research in Management Ownership Structure in Agrifood Chains: the Marketing Cooperative Bibliographic Data and Classifications , 2022 .

[5]  Tobias Wenzel,et al.  Getting beer during commercials: Adverse effects of ad-avoidance , 2011, Inf. Econ. Policy.

[6]  A. Barth,et al.  Does the growth of mobile markets cause the demise of fixed networks? - Evidence from the European Union , 2014 .

[7]  Roman Inderst,et al.  Countervailing power and dynamic efficiency , 2011 .

[8]  Justus Haucap,et al.  On File Sharing With Indirect Network Effects Between Concert Ticket Sales and Music Recordings , 2012 .

[9]  Janusz A. Ordover,et al.  Equilibrium Vertical Foreclosure , 2010 .

[10]  Kenneth Hendricks,et al.  A Theory of Bilateral Oligopoly , 2010 .

[11]  Vertical Integration with Complementary Inputs , 2013 .

[12]  Brown,et al.  MARGINAL CONTRIBUTIONS AND EXTERNALITIES IN THE VALUE , 2008 .

[13]  A. Barth,et al.  Irrationality rings! - Experimental evidence on mobile tariff choices , 2011 .

[14]  Joseph A. Clougherty,et al.  Using rival effects to identify synergies and improve merger typologies , 2010 .

[15]  Christopher M. Snyder,et al.  Vertical Foreclosure in Experimental Markets , 1999 .

[16]  David Wettstein,et al.  Sharing the surplus: An extension of the Shapley value for environments with externalities , 2007, J. Econ. Theory.

[17]  Ralf Dewenter,et al.  Semi-collusion in media markets , 2011 .

[18]  J. Gans,et al.  Vertical Integration in the Presence of Upstream Competition , 2004 .

[19]  Justus Haucap,et al.  Consumer Behavior towards On-net/Off-net Price Differentiation , 2011 .

[20]  J. Tirole,et al.  Vertical integration and market foreclosure , 1990 .

[21]  Alan T. Sorensen Insurer-hospital bargaining: negotiated discounts in post-deregulation connecticut , 2003 .

[22]  Ulrich Schwalbe,et al.  Economic principles of state aid control , 2011 .

[23]  Jean-Philippe Nicolaï,et al.  The Role of Abatement Technologies for Allocating Free Allowances , 2011 .

[24]  Lars Stole,et al.  Intra-firm Bargaining under Non-binding Contracts , 1996 .

[25]  Tobias Wenzel,et al.  Deregulation of Shopping Hours: The Impact on Independent Retailers and Chain Stores , 2011 .

[26]  Yongmin Chen,et al.  On Vertical Mergers and Their Competitive Effects , 2001 .

[27]  Paolo Buccirossi,et al.  Competition Policy and Productivity Growth: An Empirical Assessment , 2009 .

[28]  Ronald Peeters,et al.  The Impact of Timing on Bidding Behavior in Procurement Auctions of Contracts with Private Costs , 2010 .

[29]  Hans-Theo Normann,et al.  A Within-Subject Analysis of Other-Regarding Preferences , 2010, Games Econ. Behav..

[30]  Lars Stole,et al.  Mergers, Employee Hold-Up and the Scope of the Firm: An Intrafirm Bargaining Approach to Mergers , 2008 .

[31]  Bertrand Competition in Markets with Network Effects and Switching Costs , 2008 .

[32]  Torben Stühmeier,et al.  Access regulation with asymmetric termination costs , 2013 .

[33]  M. Salinger,et al.  Vertical Mergers and Market Foreclosure , 1988 .

[34]  Clémence Christin,et al.  Entry Deterrence Through Cooperative R&D Over-Investment , 2013 .

[35]  Christian Wey,et al.  On the role of consumer expectations in markets with network effects , 2012 .

[36]  Ulrich Heimeshoff,et al.  Pull-forward effects in the German car scrappage scheme: A time series approach , 2012 .

[37]  Jonas Björnerstedt,et al.  Bilateral oligopoly — The efficiency of intermediate goods markets , 2007 .

[38]  J. Gans,et al.  Can Vertical Integration by a Monopsonist Harm Consumer Welfare? , 2003 .

[39]  Julia Graf,et al.  The effects of rebate contracts on the health care system , 2014, The European Journal of Health Economics.

[40]  O. Hart,et al.  Property Rights and the Nature of the Firm , 1988, Journal of Political Economy.

[41]  Asher Wolinsky,et al.  BILATERAL MONOPOLIES AND INCENTIVES FOR MERGER , 1988 .

[42]  Stefan Haigner,et al.  The first shall be last: serial position effects in the case contestants evaluate each other , 2010 .

[43]  Volker Benndorf,et al.  Competition in the Workplace: An Experimental Investigation , 2012 .

[44]  Annika Herr,et al.  Quality and Welfare in a Mixed Duopoly with Regulated Prices: The Case of a Public and a Private Hospital , 2011 .

[45]  Achim Hauck,et al.  The euro area interbank market and the liquidity management of the eurosystem in the financial crisis , 2010 .

[46]  Klaus Gugler,et al.  How Effective is European Merger Control , 2011 .

[47]  Sang-Seung Yi,et al.  Vertical Foreclosure with the Choice of Input Specifications , 1997 .

[48]  Mehmet Karacuka,et al.  A Spatial Approach To Measure Productivity Spillovers Of Foreign Affiliated Firms In Turkish Manufacturing Industries , 2012 .

[49]  Claudia Keser,et al.  Technology adoption in markets with network effects: Theory and experimental evidence , 2012, Inf. Econ. Policy.

[50]  Ralf Dewenter,et al.  More Ads, More Revs? Is there a Media Bias in the Likelihood to be Reviewed? , 2012 .

[51]  Hans-Theo Normann,et al.  The impact of the termination rule on cooperation in a prisoner’s dilemma experiment , 2011, International Journal of Game Theory.

[52]  Mehmet Karaçuka,et al.  The bank lending channel in Turkey: has it changed after the low-inflation regime? , 2012 .

[53]  Hans-Theo Normann,et al.  Vertical Mergers, Foreclosure and Raising Rivals' Costs – Experimental Evidence , 2011 .

[54]  Matthias Heinz,et al.  Do Women Behave More Reciprocally than Men? Gender Differences in Real Effort Dictator Games , 2012 .

[55]  Annika Herr,et al.  Pharmaceutical prices under regulation: Tiered co-payments and reference pricing in Germany , 2012 .

[56]  A. Roth The Shapley value , 2005, Game Theory.

[57]  Gordon J. Klein,et al.  How regulation affects network and service quality in related markets , 2012 .

[58]  Ralf Dewenter,et al.  Calling Party Pays or Receiving Party Pays? The Diffusion of Mobile Telephony with Endogenous Regulation , 2005 .

[59]  A. Barth,et al.  How large is the magnitude of fixed-mobile call substitution? Empirical evidence from 16 Europen countries , 2012 .

[60]  Christopher M. Snyder,et al.  Countervailing Power in Wholesale Pharmaceuticals , 2001 .

[61]  B. Balsmeier,et al.  Outside board memberships of CEOs: Expertise or entrenchment? , 2011 .

[62]  Tobias Wenzel,et al.  Regulating Advertising in the Presence of Public Service Broadcasting , 2012 .

[63]  Justus Haucap,et al.  The Effects of Gasoline Price Regulations: Experimental Evidence , 2013 .

[64]  Tobias Wenzel,et al.  Price-Dependent Demand in Spatial Models , 2012 .

[65]  Ulrich Heimeshoff,et al.  The extent of European power markets , 2014 .

[66]  N. Jentzsch,et al.  Targeted pricing and customer data sharing among rivals , 2013 .

[67]  Vertical Enclosure: Vertical Integration and the Reluctance to Purchase from a Competitor , 2004 .

[68]  J. Montez Downstream mergers and producer's capacity choice: why bake a larger pie when getting a smaller slice? , 2007 .

[69]  Luigi Zingales,et al.  Power in a Theory of the Firm , 1996 .

[70]  Sanford J. Grossman,et al.  The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration , 1986 .

[71]  Ilya Segal,et al.  Collusion, Exclusion, and Inclusion in Random-Order Bargaining , 2003 .

[72]  Mehmet Karaçuka,et al.  Competition in Turkish mobile telecommunications markets: Price elasticities and network substitution , 2011 .

[73]  Tomaso Duso,et al.  An Empirical Assessment of the 2004 EU Merger Policy Reform , 2013 .

[74]  Torben Stühmeier,et al.  Roaming and investments in the mobile internet market , 2012 .

[75]  M. Whinston,et al.  Incomplete Contracts, Vertical Integration, and Supply Assurance , 1993 .

[76]  Philippe Aghion,et al.  Financial Valuation and Risk Management Working Paper No . 435 Vertical Integration and Technology : Theory and Evidence , 2007 .

[77]  Roman Inderst,et al.  Bargaining, Mergers and Technology Choice in Bilaterally Oligopolistic Industries , 2001 .

[78]  Roger Clarke,et al.  Buyer Power and its Impact on Competition in the Food Retail Distribution Sector of the European Union , 2001 .

[79]  Hans Christian Müller,et al.  Forecast Errors in Undisclosed Management Sales Forecasts: The Disappearance of the Overoptimism Bias , 2011 .

[80]  Christian Kellner,et al.  The Effect of Ambiguity Aversion on Reward Scheme Choice , 2014 .

[81]  Mehmet Karaçuka,et al.  A comparative analysis of alternative univariate time series models in forecasting Turkish inflation , 2012 .

[82]  Geza Sapi,et al.  Technology Licensing by Advertising Supported Media Platforms: An Application to Internet Search Engines , 2011 .

[83]  Thomas D. Jeitschko,et al.  Signaling in deterministic and stochastic settings , 2012 .

[84]  Tobias Wenzel,et al.  Transparency, price-dependent demand and product variety , 2011 .

[85]  J. Gans,et al.  Vertical Integration and Competition Between Networks , 2005 .