Losses from Horizontal Merger: an Extension to a Successive Oligopoly Model with Product Differentiation

This paper generalizes the model of Salant et al. (1983; Quarterly Journal of Economics, Vol. 98, pp. 185–199) to a successive oligopoly model with product differentiation. Upstream firms produce differentiated goods, retailers compete in quantities, and supply contracts are linear. We show that if retailers buy from all producers, downstream mergers do not affect wholesale prices. Our result replicates that of Salant's, where mergers are not profitable unless the size of the merged firm exceeds 80 per cent of the industry. This result is robust to the type of competition.

Fauli-Oller gratefully acknowledges financial support from Ministerio de Ciencia e Innovación and FEDER funds under project SEJ 2007-62656, from the Spanish Ministerio de Economía y Competitividad (ECO2012-34928), from Generalitat Valenciana grant PROMETEO/2013/037 and the IVIE. Mesa-Sánchez gratefully acknowledges the financial support of Ministerio de Economía y Competitividad of Spain, under grant ECO2011-30323-C03-03.