Vertical Arrangements and Upstream Mergers

31 Pages Posted: 15 Aug 2018

See all articles by Emmanuel Petrakis

Emmanuel Petrakis

University of Crete - Department of Economics

Panagiotis Skartados

University of Crete - Department of Economics

Date Written: July 17, 2018

Abstract

We study the incentives for horizontal upstream mergers in a quantity-setting vertically related industry, under bargain and endogenous contract types. We show that the contract types used could have important consequences for the equilibrium market structure and vice versa. If it is the retailers who choose contract types, they share the same preferences as the policymakers and choose to offer two-part tariff contracts, leading the suppliers not to merge. This result has some obvious policy implications. If it is the suppliers who decide contract types, they prefer to merge and offer a partial forward vertical ownership scheme. Under Bertrand competition, there is always an upstream merger, but the common manufacturer will offer a two-part tariff contract for intermediate bargain power levels. For high bargain power levels, he will choose a partial forward vertical ownership scheme, while for low bargain power will suffer from negative profits. A policymaker, considering the maximization of the social welfare should consider the upstream merger and two-part tariff contracts.

Keywords: merger policy, vertical relations, partial forward vertical ownership, two-part tariffs, bargaining

JEL Classification: L22, L41, L42

Suggested Citation

Petrakis, Emmanuel and Skartados, Panagiotis, Vertical Arrangements and Upstream Mergers (July 17, 2018). Available at SSRN: https://ssrn.com/abstract=3223250 or http://dx.doi.org/10.2139/ssrn.3223250

Emmanuel Petrakis (Contact Author)

University of Crete - Department of Economics ( email )

GR-74100 Rethymnon, GR-74100
Greece
+30 28310 77409 (Phone)
+30 28310 77406 (Fax)

Panagiotis Skartados

University of Crete - Department of Economics ( email )

RETHIMNO
Greece

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