Input-Price Responses to Horizontal Mergers and the Bargaining-Leverage Defense

68 Pages Posted: 15 Apr 2022 Last revised: 11 Apr 2024

See all articles by Rebekah Dix

Rebekah Dix

Massachusetts Institute of Technology (MIT)

Todd Lensman

Massachusetts Institute of Technology (MIT)

Date Written: September 1, 2022

Abstract

In several recent antitrust cases, defendants have argued that a horizontal merger would allow them to negotiate reduced input prices with suppliers and pass on the resulting savings to consumers. This input price effect is often supported by models in which firms simultaneously set goods prices and bargain with suppliers over input prices, because a downstream merger can reduce suppliers’ outside options. We study new forces that arise when input prices are set before goods prices, and we show that they often tend to increase input prices after a merger. Generalizing the first-order approach to merger analysis, we derive a measure of incentives to adjust input prices after a downstream merger, Input Pricing Pressure. We use this measure to show that mergers often incentivize higher input prices, and that these incentives hinge on changes in downstream pass-through rates, marginal cost efficiencies generated by the merger, and input-output linkages. By implication, consumer surplus-maximizing antitrust policy may be too lax when input prices are assumed fixed, and it should be biased against claims that input prices will fall after a downstream merger. In an empirical application to local retail beer markets, endogenizing input prices substantially raises the consumer harm from mergers of retailers.

Keywords: antitrust, buyer power, vertical relationships

Suggested Citation

Dix, Rebekah and Lensman, Todd, Input-Price Responses to Horizontal Mergers and the Bargaining-Leverage Defense (September 1, 2022). Available at SSRN: https://ssrn.com/abstract=4074160 or http://dx.doi.org/10.2139/ssrn.4074160

Rebekah Dix (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Todd Lensman

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

HOME PAGE: http://toddlensman.com

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