Mergers between Backward Integrated Firms: Insights from Basf/Solvay's Polyamide Business

Abstract

• When a supplier has multiple uses for its product, its sales-based share in a market may provide more useful first indications of its market power in that market than its production- or capacity-based share.

• In particular, the small sales share of a supplier in a market suggests that its effective incremental cost of serving that market, which is the cost of foregoing the best alternative use for its product, is large and its market power in that market is small, irrespective of the size of its overall production or capacity.

• When the products that are manufactured with the internally sourced input are in direct competition in the downstream market with the products that are manufactured by the upstream market’s customers, internal sales of the upstream product may constitute, by increasing demand elasticity in the upstream market, an indirect competitive constraint on it.

• If the elimination of double marginalisation creates the incentive for the merged entity to expand production, a capacity constraint upstream may be reached, giving rise to effects that, being neither horizontal nor vertical in nature, we consider non-traditional.

Keywords: capacity constraints, market shares, mergers, opportunity cost

JEL Classification: K21, L4