Welfare Improving Horizontal Mergers in Successive Oligopoly

We study welfare effects of horizontal mergers in a successive oligopoly model with general demand. We find that downstream mergers can increase welfare if they reduce input price. In an environment with asymmetric upstream firms, lower input price reallocates some input production from cost-inefficient upstream firms to cost-efficient ones. In the presence of fixed cost and free entry, lower input price rationalizes the upstream sector and decreases average cost of production for each upstream firm. Both reallocation and rationalization can improve welfare. We identify necessary and sufficient conditions for welfare-improving horizontal mergers and explore how demand curvature, market structure and Herfindahl index (in case of asymmetric firms) affect these conditions. The possibility of consumer surplus improvement and upstream mergers are also explored.