Upstream horizontal mergers and vertical integration

We study upstream horizontal mergers when one of the merging parties is a vertically integrated firm. Under upstream cost symmetry and observable contracting, we demonstrate that such type of horizontal mergers always harm consumers through a vertical partial foreclosure effect. Under observable contracting but upstream asymmetric costs, we show that overall consumer surplus may increase due to the merger even though input prices increase and some consumers are worse of. Under upstream cost symmetry but unobservable contracting, we find that consumers may be better off as a result of the merger even in the absence of exogenous cost-synergies between the merging firms. In all cases under consideration, the merger is always profitable for the merging parties.