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Vertical Mergers with Input Substitution: Double Marginalization, Foreclosure and Welfare

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Abstract

We consider differentiated duopolists that face symmetric linear demands and produce using identical or different Cobb-Douglas technologies with a monopolized input and a competitively supplied input. A merger between the input monopolist and either firm eliminates double marginalization but—unlike with fixed-proportions technologies in the same setting—can lead to foreclosure and reduce consumer welfare and total welfare. The same can occur under a CES technology with greater input substitutability than Cobb-Douglas. When firms use identical Cobb-Douglas technologies, the merged firm raises the rival’s cost by more, and the welfare effects are worse, when the input it controls constitutes a low rather than high share of downstream input costs. If that share is sufficiently low then consumer welfare and total welfare decline, while rising elsewhere despite foreclosure. With different Cobb-Douglas technologies, the input monopolist may foreclose completely either firm pre-merger. A merger’s welfare effects then can be non-monotonic in the monopoly input’s share of costs. Classification-L4, L41, L42

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  • Serge Moresi & Marius Schwartz, 2021. "Vertical Mergers with Input Substitution: Double Marginalization, Foreclosure and Welfare," Working Papers gueconwpa~21-21-03, Georgetown University, Department of Economics.
    • Handle: RePEc:geo:guwopa:gueconwpa~21-21-03
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    References listed on IDEAS

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    1. Moresi, Serge & Schwartz, Marius, 2021. "Vertical mergers with input substitution: Double marginalization, foreclosure and welfare," Economics Letters, Elsevier, vol. 202(C).
    2. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-685, Winter.
    3. Inderst, Roman & Valletti, Tommaso, 2011. "Incentives for input foreclosure," European Economic Review, Elsevier, vol. 55(6), pages 820-831, August.
    4. Moresi, Serge & Schwartz, Marius, 2017. "Strategic incentives when supplying to rivals with an application to vertical firm structure," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 137-161.
    5. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58(4), pages 347-347.
    6. Arya, Anil & Mittendorf, Brian & Sappington, David E.M., 2008. "Outsourcing, vertical integration, and price vs. quantity competition," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 1-16, January.
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    Cited by:

    1. Serge Moresi & David Reitman & Steven C. Salop & Yianis Sarafidis, 2021. "Vertical Mergers in a Model of Upstream Monopoly and Incomplete Information," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 59(2), pages 363-380, September.
    2. Moresi, Serge & Schwartz, Marius, 2021. "Vertical mergers with input substitution: Double marginalization, foreclosure and welfare," Economics Letters, Elsevier, vol. 202(C).
    3. Konstantinos G. Papadopoulos & Emmanuel Petrakis & Panagiotis Skartados, 2022. "The ambiguous competitive effects of passive partial forward ownership," Southern Economic Journal, John Wiley & Sons, vol. 89(2), pages 540-568, October.
    4. Nicolas Pasquier, 2024. "Decentralization and Consumer Welfare with Substitutes or Complements," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(3), pages 449-469, May.
    5. Papadopoulos, Konstantinos G. & Skartados, Panagiotis, 2021. "The ambiguous competitive effects of passive partial forward integration," UC3M Working papers. Economics 33354, Universidad Carlos III de Madrid. Departamento de Economía.

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    More about this item

    Keywords

    Vertical Mergers; Foreclosure; Input Substitution; Antitrust;
    All these keywords.

    JEL classification:

    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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