Document Type
Article
Publication Date
2021
Abstract
We examine the role of private information on the impact of vertical mergers. A vertical merger can improve the information that is available to an upstream monopolist because, after the merger, the monopolist can observe the cost of its downstream merger partner. In the pre-merger world, because the costs of the downstream firms are private information, the monopolist has incomplete information and cannot implement the monopoly outcome: The expected pre-merger equilibrium price of the downstream product is lower than the monopoly price. After a vertical merger, the equilibrium input price that is charged to the downstream rival can either increase or decrease -- depending on whether the downstream merger partner’s cost is low or high, respectively. However, in all cases the equilibrium price of the downstream product increases to the monopoly price. Therefore, the merger leads to consumer harm even when it leads to a reduction in the input price. The merged firm, however, cannot extract all of the monopoly profit: The merger causes production inefficiency (when the downstream rival has a relatively small cost advantage) and the downstream rival still earns an information rent (when it has a relatively large cost advantage). These results also have implications for vertical merger policy.
Publication Citation
Forthcoming in Review of Industrial Organization, Special Issue: The U.S. Vertical Merger Guidelines.
Scholarly Commons Citation
Moresi, Serge; Reitman, David; Salop, Steven C.; and Sarafidis, Yianis, "Vertical Mergers in a Model of Upstream Monopoly and Incomplete Information" (2021). Georgetown Law Faculty Publications and Other Works. 2403.
https://scholarship.law.georgetown.edu/facpub/2403
Included in
Antitrust and Trade Regulation Commons, Business Organizations Law Commons, Corporate Finance Commons, Law and Economics Commons, Securities Law Commons