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Wilfrid Laurier University School of Business & Economics
April 21, 2014
 
 
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2003-10 EC: Vertical separation, intra-firm competition and mergers (Working Paper)


Ziss, S.

published: 2003 | Research publication | Working Paper - Economics

ABSTRACT  This paper analyses the profit and welfare consequences of merger in a vertically separated manufacturer-retailer setting. The main argument is that vertical separation increases the set of strategic options available to the merging parties. In particular, the merging parties (insiders) can either credibly commit to an output contraction strategy by bringing about insider collusion at both the upstream wholesale (or transfer) pricing stage and the downstream retail stage, or to an output expansion strategy by bringing about insider collusion at the downstream retail stage but maintaining insider competition at the upstream wholesale pricing stage. The output contraction and expansion strategies prove to be complementary in that the former is profitable in concentrated market settings whereas the latter is more profitable in unconcentrated market settings. Furthermore a merger can be welfare enhancing if it results in the insiders adopting the output expansion strategy.

Keywords: competition, mergersVertical separation, common agency, exclusive dealing, intra-firm

JEL Classification Numbers: L10, L20, L40.

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revised Dec 1/04

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