DP2981 | Bargaining, Mergers and Technology Choice in Bilaterally Oligopolistic Industries

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This Paper provides a conceptual framework of multilateral bargaining in a bilaterally oligopolistic industry to analyse the motivations for horizontal mergers, technology choice, and their welfare implications. We first analyse the implication of market structure for the distribution of industry profits. We find that retailer mergers are more likely (less likely) if suppliers have increasing (decreasing) unit costs, while supplier mergers are more likely (less likely) if goods are substitutes (complements). In a second step we explore how market structure affects suppliers' technology choice, which reflects a trade-off between infra-marginal and marginal production costs. We find that suppliers focus more on marginal cost reduction if (i) retailers are integrated and (ii) suppliers are non-integrated. In a final step we consider the whole picture where both market structure and (subsequent) technology choice are endogenous. Analysing the equilibrium market structure, we find cases where retailers become integrated to induce suppliers to choose a more efficient technology, even though integration weakens their bargaining position. In this case the merger benefits all parties, i.e., suppliers, retailers, and even consumers. We also show that the equilibrium market structure does often not maximize welfare.