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Waterbed Effects and Buyer Mergers

Author

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  • Adrian Majumdar

    (Centre for Competition Policy, University of East Anglia and RBB Economics)

Abstract

This paper demonstrates how a profitable, downstream merger 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.

Suggested Citation

  • Adrian Majumdar, 2005. "Waterbed Effects and Buyer Mergers," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2005-07, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:ueaccp:2005_07
    as

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    File URL: https://ueaeco.github.io/working-papers/papers/ccp/CCP-05-07.pdf
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    References listed on IDEAS

    as
    1. Inderst, Roman & Wey, Christian, 2007. "Buyer power and supplier incentives," European Economic Review, Elsevier, vol. 51(3), pages 647-667, April.
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    Cited by:

    1. Stephen P. King, 2013. "Buyer Groups, Antitrust and Outsiders," The Economic Record, The Economic Society of Australia, vol. 89(284), pages 1-18, March.
    2. Chris Doyle & Martijn Han, 2014. "Cartelization Through Buyer Groups," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(3), pages 255-275, May.
    3. Harold Creusen & Arno Meijer & Gijsbert Zwart & Henry van der Wiel, 2008. "Static efficiency in Dutch supermarket chain," CPB Document 163, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Stephen P. King, 2013. "Countervailing Power and Input Pricing: When is a Waterbed Effect Likely?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 20(3), pages 325-340, November.
    5. Smith, Howard & Thanassoulis, John, 2012. "Upstream uncertainty and countervailing power," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 483-495.
    6. David Mills, 2013. "Countervailing Power and Chain Stores," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 42(3), pages 281-295, May.
    7. Roman Inderst & Tommaso M. Valletti, 2011. "Buyer Power And The ‘Waterbed Effect’," Journal of Industrial Economics, Wiley Blackwell, vol. 59(1), pages 1-20, March.

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    More about this item

    Keywords

    Buyer Power; Raising Rivals' Costs.;

    JEL classification:

    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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