Beyond "Horizontal" and "Vertical": The Welfare Effects of Complex Integration

Loudermilk, Margaret; Sheu, Gloria; Taragin, Charles

doi:10.17016/FEDS.2023.005

Working Paper

Beyond "Horizontal" and "Vertical": The Welfare Effects of Complex Integration

Abstract: We study the welfare impacts of mergers in markets where some firms are already vertically integrated. Our model features logit Bertrand competition downstream and Nash Bargaining upstream. We numerically simulate four merger types: vertical mergers between an unintegrated retailer and an unintegrated wholesaler, downstream "horizontal" mergers between an unintegrated retailer and an integrated retailer/wholesaler, upstream "horizontal" mergers between an unintegrated wholesaler and an integrated retailer/wholesaler, and integrated mergers between two integrated retailer/wholesaler pairs. We find that mergers that have both horizontal and vertical characteristics typically harm consumers. We apply the model to the Republic/Santek merger as a real-world example.

Keywords: Bargaining models; Merger simulation; Vertical markets; Vertical mergers;

JEL Classification: L13; L40; L41; L42;

https://doi.org/10.17016/FEDS.2023.005