Upstream Horizontal Mergers and Efficiency Gains

Résumé

We study horizontal mergers in upstream markets and their potential efficiency gains. We explore the incentives for such mergers, their impact on R&D investments, as well as the interaction in terms of welfare between their potentially efficiency-enhancing effects and their anti-competitive effects. We show that when trading takes place through two-part tariff contracts, an upstream horizontal merger can give rise to two distinct efficiency- enhancing effects. It can increase the R&D investments and decrease the wholesale prices. Most of the times, when firms merge usually both of these efficiencies are realized and thus the merger is pro-competitive. When firms trade using wholesale price contracts, upstream firms always merge. There are two opposite efficiency effects in place then. The merger increases the effective R&D investments but it also aggravates the severity of the double marginalization problem. Which of the two effects prevails for the merger’s welfare impact depends mainly on the intensity of downstream competition.