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This paper studies how the buyer power of downstream firms can affect the market outcomes in both upstream manufacturing and downstream retail markets.
This paper studies how the buyer power of downstream firms can affect the market outcomes in both upstream manufacturing and downstream retail markets. In a two-tier oligopoly, where upstream firms are locked in a pair-wise exclusive relationship with their downstream retailers, we study the choice of firms between vertical merger and Nash Bargaining with two part tariff regimes. On working with three cases of no vertical merger, single chain vertical merger and double chain vertical merger we find that joint profits of upstream and downstream firms are lowest when both channels choose vertical integration as compared to Nash Bargaining regime. We also find that Vertical integration is welfare enhancing because retail price will be minimum as upstream and downstream firms behave as a single entity. Hence for both single and double chain mergers, elimination of double marginalization is procompetitive. These results have implications for the enforcement of competition (antitrust) law.