Vertical Restraints and the Effects of Upstream Horizontal Mergers

• Published date: 01 April 2007
• DOI: https://doi.org/10.1016/S0573-8555(06)82014-6
• Pages: 369-381
• Date: 01 April 2007
• Author: Luke Froeba,Steven Tschantz,Gregory J. Werden

CHAPTER 14

Vertical Restraints and the Effects of

Upstream Horizontal Mergers1

Luke Froeba,*, Steven Tschantzband Gregory J. Werdenc

aOwen Graduate School of Management, VanderbiltUniversity, Nashville, TN 37203

E-mail address: luke.froeb@vanderbilt.edu

bDepartment of Mathematics, VanderbiltUniversity, Nashville, TN 37203

E-mail address: tschantz@math.vanderbilt.edu

cU.S. Department of Justice, Washington, DC 20530

E-mail address: gregory.werden@usdoj.gov

Abstract

The downstream effects of mergers between manufacturers of differentiated

consumer products are partly determined by the relationship between the merg-

ing manufacturers and retailers. The relationship may be such that the retail

price effects of the merger are exactly those if the manufacturers sold directly

to consumers, and that relationship may be such that the merger produces sim-

ilar effects with subtle differences, including the possibility of price decreases

for non-merging products. Alternatively,that relationship may be such that con-

sumer prices do not change following a merger.

Keywords: vertical restraints, pass-through, mergers, retailing

JEL classifications: L41, L44

14.1. Introduction

Formal modeling of merger price effects has become a standard tool of analysis.

A conventional oligopoly model, calibrated to fit the particular industry under

review, is often used to assess the likely price effects of proposed mergers. As

applied to mergers involving differentiatedconsumer products, this tool was en-

dorsed by the court in the Oracle case (2004, p. 1122). To analyze competition

among differentiated consumer products, economists generally use a Bertrand

model, in which equilibrium is reached when all competitors are happy with

1Support for this project was provided by the Dean’s fund for faculty research. The views ex-

pressed in this chapter are not purported to represent those of the U.S. Department of Justice.

*Corresponding author.

CONTRIBUTIONS TO ECONOMIC ANALYSIS © 2007 ELSEVIER B.V.

VOLUME 282 ISSN: 0573-8555 ALL RIGHTS RESERVED

DOI: 10.1016/S0573-8555(06)82014-6