Merger Efficiency and Welfare Implications of Buyer Power

28 Pages Posted: 18 Jul 2011 Last revised: 4 Aug 2011

See all articles by Özlem Bedre-Defolie

Özlem Bedre-Defolie

ESMT European School of Management and Technology; University of Bergen, Economics Department; CEPR IO

Stephane Caprice

University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: July 14, 2011

Abstract

This paper analyzes the welfare implications of buyer mergers, which are mergers between downstream firms from different markets. We focus on the interaction between the merger's effects on downstream efficiency and on buyer power in a setup where one manufacturer with a non-linear cost function sells to two locally competitive retail markets. We show that size discounts for the merged entity has no impact on consumer prices or on smaller retailers, unless the merger affects the downstream efficiency of the merging parties. When the upstream cost function is convex, we find that there are “waterbed effects,” that is, each small retailer pays a higher average tariff if a buyer merger improves downstream efficiency. We obtain the opposite results, “anti-waterbed effects,” if the merger is inefficient. When the cost function is concave, there are only anti-waterbed effects. In each retail market, the merger decreases the final price if and only if it improves the efficiency of the merging parties, regardless of its impact on the average tariff of small retailers.

Keywords: buyer mergers, non-linear supply contracts, merger efficiencies, size discounts, waterbed effects

JEL Classification: D43, K21, L42

Suggested Citation

Bedre-Defolie, Özlem and Caprice, Stephane, Merger Efficiency and Welfare Implications of Buyer Power (July 14, 2011). ESMT Working Paper No. 11-07; DIW Berlin Discussion Paper No. 1144. Available at SSRN: https://ssrn.com/abstract=1888293 or http://dx.doi.org/10.2139/ssrn.1888293

Özlem Bedre-Defolie (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany
+49(0)30212311531 (Phone)

HOME PAGE: http://www.esmt.org

University of Bergen, Economics Department ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway

CEPR IO ( email )

London
United Kingdom

Stephane Caprice

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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