Horizontal mergers and successive oligopoly

This paper considers a successive oligopoly setting in which a set of upstream firms sell output non-exclusively to a group of downstream firms using a linear tariff. If the concavity of retail demand is constant then the profitability of horizontal merger at either the upstream or the downstream stage is shown to depend on the number of firms in the stage experiencing the merger and not on the number of firms in the other stage. Furthermore, the profitability of merger at either stage is the same as the profitability of merger amongst a set of vertically integrated firms in a setting in which all firms are vertically integrated. Finally, mergers at either stage are shown to reduce the sum of producer and consumer surplus. Moreover the negative effects of merger on surplus are unambiguously increased by increases in concentration in the merging stage and ambiguously affected by increases in concentration in the non-merging stage. © 2005 Springer Science + Business Media, Inc.