Vertical mergers between upstream suppliers and downstream firms raise important questions about how pricing and competition may change after integration. When a supplier merges with one of several downstream competitors, the merged firm may alter the sequence in which prices are set, affecting upstream input prices and downstream retail prices. Evaluating these effects requires understanding how the timing of pricing decisions and the relative size of the merging firms influence post-merger incentives and competitive outcomes. 
 
In the article “Simulating Vertical Mergers,” Senior Consultant Gleb Domnenko and co-author David S. Sibley develop a model of a vertical merger between a monopolistic upstream supplier and one of two downstream competitors. Using simulations, the authors examine how such mergers affect prices, market shares, and profits. Dr. Domnenko finds that the merged firm may choose to act either first or second in setting prices, often lowering its own downstream price while making it more difficult for the rival firm to compete. The authors’ analysis also examines the widely used vertical GUPPI (vGUPPI) screen and shows its ability to predict post-merger price effects may be limited, particularly when the acquired downstream firm is small.