Waterbed Effects and Buyer Mergers

Abstract

This paper demonstrates how a profitable, downstream merget can lower the merged entity's input price while raising that of its rivals, leading to an adverse effect on final consumers. This novel 'waterbed' result is surprising and very different to the unilateral and co-ordinated effects usually considered in the analysis of horizontal mergers. When demand is linear, all mergers involving a powerful buyer harm overall welfare even though the merger leads to marginal cost reductions that substantially increase output by the merged entity.

Keywords: Mergers, buyer power, raising rivals' costs

JEL Classification: L40, D43