Despite the common view that vertical mergers are generally less problematic than horizontal mergers, it is also recognized that they are not always innocuous. We discuss and explain a remarkably general scenario in which a vertical merger reduces social surplus. In a setup in which suppliers’ costs are their own private information, if the pre-integration market involves a buyer using an efficient procurement process to purchase from the suppliers, then the post-integration market will be less efficient than the pre-integration market. Specifically, the integrated firm will, at least sometimes, source the input internally, from its integrated supplier, even though an independent supplier has a lower cost. This happens because bilateral bargaining between the integrated firm and the independent supplier is inefficient – it suffers from what economists refer to as a Myerson-Satterthwaite problem.

By Simon Loertscher & Leslie M. Marx1

 

I. INTRODUCTION

The U.S. Department of Justice and Federal Trade Commission’s “Vertical Merger Guidelines” (June 30, 2020) emphasize positive effects of vertical integration:2 “Vertical mergers combine complementary economic functions and eliminate contracting frictions, and therefore have the capacity to create a range of potentially cognizable efficiencies that benefit competition and consumers” (p. 11). That said, they also recognize that “While the agencies more often encounter problematic horizontal mergers

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