IO 8 Vertical Mergers

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  • Created by: erised
  • Created on: 24-05-18 10:31

Double Marginalization

  • Firms at different stages of the production chain have market power. Each firm implements its own monopolostic mark-up. This distorts the decsion of downstream firms.
  • This lack of co-ordination of their pricing decisions leades the double marginalization phenomenon.
  • A vertical marger will be able to reduce this welfate loss by incorporating both costs inside the same decision maker, and do internalizing the externality. 
  • Example- Producer M c=2, Retailer F c=w, Q=20-P. Find with no merger
  • Analyse the Retailers decision:
  • -
  • Maxmise profits
  • -
  • This is the demand funtion for the manufacturer
  • -
  • Analyse the manufactuers decision
  • -
  • Max profits
  • -
  • Find w, P, Q
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Double Marginalization

  • Now suppose the firms merge.
  • One single monopoly with demand Q=20-P, Mc=2.
  • Monopoly maximises profits by MR=MC
  • TR=
  • MR=
  • MR=MC
  • -
  • Q=
  • P=

Merger has benefited the two firms. Proit post merger>profit pre merger

Merger has benefited consumers. 

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Anticompetitive Impacts

  • Analysis so far suggests that anti-trust authorities should be less concerned about the welfare impact of vertical mergers that the impact of horizonal mergers.
  • Based on two important assumptions:
    • There is a signle market in which final goods are sold
    • There is a monopoly at each stage in the vertical chain
  • Consider relaxing these assumptions
    • Price discrimination
    • Vertical Foreclosure
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Price Discrimination

  • Upstream firm selling to two downstream markets.
  • Seller wants to price discriminate between these markets. Sets v1<v2.
  • Suppose that buyers can arbitrage
  • Buyer 2 offers to buy from buyer 1 at a price va(between v1 and v2)
  • Arbitrage prevents price discrimination
  • If the seller integrates into market 1 arbitrage is prevented
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Vertical Foreclosure

  • Suppose that instead of monopoly at both stages of production, we had monopoply at one stage and a competitive sector at the other.
  • Either price competittion among manufactures leads to a wholesale price =MC
  • Or price competition among retailers leads to a retails price = upstream price + downstream MC
  • In either case, no double marginalization problem, so no efficient gain to vertical integration.
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