Analyzing the Effects of Vertical Mergers: Incentives Matter, But Market Shares Do Not
1 July 2004
By Dr. Timothy Daniel
For some products, the supply chain that connects producers of raw materials with manufacturers, wholesalers, distributors, and retailers is relatively simple and straightforward. For other products, it is a complicated chain of steps that can involve complex contracts and supply agreements, the formation of production or research joint ventures, and the integration of successive stages of the production process. Whether the supply chain is simple or not, competition is a key element in each step of the process.
In this chapter from Economics of Antitrust: New Issues, Questions, and Insights, NERA Senior Vice President Dr. Timothy Daniel discusses the questions that must be answered when evaluating the competitive impact of a merger involving firms that are in different stages of the supply chain. When evaluating a "vertical merger," it is tempting to rely on statistics such as market shares and market concentration, but as Dr. Daniel explains, we should avoid this analytical shortcut. Given the complex incentives that govern the relationships between vertically related entities, there are far more important considerations, such as the nature of the supply arrangements prior to the merger, possible capacity constraints, and switching costs.
