Horizontal Mergers and Supplier Power

Senior Vice President and Head of Research, Joe Perkins, co-authored a paper alongside Shiva Shekhar for the Review of Industrial Organization Journal discussing whether powerful suppliers can counteract the negative effects of downstream mergers on consumer prices using a stylised upward pricing pressure (UPP) formula.

This article was originally published in the Review of Industrial Organization Journal here. The views expressed in this paper are the sole responsibility of the authors and cannot be attributed to Compass Lexecon or any other parties.

Abstract

Supplier market power—such as the ability of branded goods suppliers to dictate terms to retailers—is an important feature of many markets. We show that supplier power can counteract the effects of downstream mergers on consumer prices where there are two-part contracts. This is because greater market power allows suppliers to set contracts that internalise partially the impact of the merger on downstream prices. Post-merger, the supplier reduces the per-unit price at which it supplies the merged downstream firms, with the aim of maintaining total industry profitability— and then recoups the profits via a larger fixed fee. We modify the standard upward pricing pressure (UPP) formula to account for the supplier’s response to a horizontal merger in the downstream market, while preserving much of the simplicity of the standard approach.

Read the full article here