Buyer Power and Vertical Mergers in Supply Chain Competition

This paper examines how downstream firms’ buyer power influences market outcomes in upstream manufacturing markets and in downstream retail markets. In a competition between rival supply chains where upstream firms enter into a pair-wise exclusive relationships with their downstream retailers, we investigate how firms choose between a vertical merger regime and a downstream first-mover pricing regime. We analyse the three cases—no vertical merger; single-chain vertical merger; and double-chain vertical merger and conclude that upstream and downstream firms prefer vertical integration over downstream first-mover pricing only when products are more differentiated. For both single-chain and double-chain mergers, the elimination of double marginalization is pro-competitive when products are differentiated. Therefore, the antitrust authority can prevent such proposals of merger which occurs in industry where products are homogenous in nature as welfare is inevitably reduced in those cases. However, antitrust authorities can deny the welfare-decreasing mergers but sadly it cannot enforce welfare-improving ones.