Efficient Vertical Merger Waves with Heterogenous Suppliers

34 Pages Posted: 10 Aug 2023

Date Written: July 2023

Abstract

Throughout history, vertical merger waves have played a crucial role in shaping industries and market structures. However, opinions on the competitive and welfare effects associated with this phenomenon differ. Some argue that vertical merger waves increase market power and enable the exclusion of non-integrated downstream competitors. On the other hand, proponents of these transactions emphasize their efficiency gains. Recent studies raise concerns about the efficiency gains narrative and supports the idea that downstream exclusion is the main out- come of such merger waves. Nevertheless, we contend that this negative conclusion is not universally applicable and does not hold true when upstream suppliers operate under different marginal production costs and the downstream market is fully covered. Under these conditions, our argument suggests that vertical merger waves actually result in pro-competitive outcomes. This is because these waves assist less efficient suppliers in establishing a protected position in the downstream market, serving as a ësafe harboríthat prevents their more efficient competitors from leveraging their cost advantage to erect (contractual) barriers to entry in the upstream market and monopolize the downstream market. Essentially, when suppliers feature different degrees of efficiency and the market is fully covered, vertical merger waves promote a competitive environment by enabling weaker suppliers to secure their foothold and impede the dominance of stronger rivals.

Keywords: Merger Waves, Vertical Contracting, Vertical Integration

JEL Classification: L42, L50, L81

Suggested Citation

Padilla, Jorge and Piccolo, Salvatore, Efficient Vertical Merger Waves with Heterogenous Suppliers (July 2023). Available at SSRN: https://ssrn.com/abstract=4527904 or http://dx.doi.org/10.2139/ssrn.4527904

Jorge Padilla

Compass Lexecon ( email )

Paseo de la Castellana 7
Madrid, 28046
Spain

Salvatore Piccolo (Contact Author)

Compass Lexecon ( email )

Italy

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