Working Paper: CEPR ID: DP13671
Authors: Jerome Pouyet; Johan Hombert; Nicolas Schutz
Abstract: We develop a model of vertical merger waves and use it to study the optimal merger policy. As a merger wave can result in partial foreclosure, it can be optimal to ban a vertical merger that eliminates the last unintegrated upstream firm. Such a merger is more likely to worsen market performance when the number of downstream firms is large relative to the number of upstream firms, and when upstream contracts are non-discriminatory, linear, and public. On the other hand, the optimal merger policy can be non-monotonic in the strength of synergies or in the degree of downstream product differentiation.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| vertical merger waves (L22) | partial foreclosure (G33) |
| last unintegrated upstream firm eliminated (L19) | higher input prices (L11) |
| higher input prices (L11) | worse market performance (P17) |
| number of downstream firms large relative to upstream firms (L19) | likelihood of negative market performance increases (G41) |
| stronger synergies from mergers (G34) | worse market outcomes (D52) |
| optimal merger policy scrutinizes mergers eliminating last unintegrated upstream firm (L12) | tradeoff between efficiency gains and risk of foreclosure (G21) |
| downstream product differentiation (L15) | ambiguous effects on market performance (G41) |
| upstream contracts public, linear, and non-discriminatory (L97) | heighten risk of adverse market effects (E44) |