Profitability of Horizontal Mergers with Price Interdependencies

We investigate how a downstream merger affects input prices and equilibrium profits when there are price interdependencies among firms. To do so, we develop a very simple model where different inputs, provided by monopolist suppliers, may be combined to produce differentiated products sold by oligopolist downstream units. We show that when the number of final products that may be produced is small, being an outsider is always better than participating in a downstream merger. When instead the number of final products is sufficiently large, some outsiders gain more than the participants but others lose. Thus if firms are uncertain about their rivals' willingness to merge, they might still have incentives to merge to eliminate the risk of being harmed by a merger between their competitors. We also show that if the products are not too differentiated no subsequent merger by the less benefitted/harmed firms will take place.