Concentration-Based Merger Tests and Vertical Market Structure

Abstract

This paper derives a concentration measure for markets with multiple vertical segments. The measure is derived using a model of vertical contracting where upstream and downstream firms bargain bilaterally and may be integrated. The resulting vertical Hirschman-Herfindahl Index provides a measure of the degree of distortion in the vertical chain as a result of both horizontal concentration in a segment and the degree of vertical integration. Utilization of this measure would allow competition authorities to distinguish between the differing competitive impacts of upstream and downstream competition, the relative size of integrated firms in each segment, and to provide a quantitative threshold test for vertical mergers.

Keywords: vertical contracting, mergers, concentration, Hirschman-Herfindahl index

JEL Classification: L40