lec4_col - 1 Business and Government Lecture 4 Vertical...

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Unformatted text preview: 1 Business and Government Lecture 4: Vertical Merger and Restraints Dr Nishaal Gooroochurn Room: MG5-13 Email: [email protected] Office Hours: Tuesday 4-5 pm Thursday 4-5 pm Outline Reading 1. Economics of Regulation and Antitrust, Viscusi, Vernon, Harrington – Chap 8 2. Competition Policy, Motta – Chap 6 1. Introduction 2. Intra-Brand Competition 3. Inter-Brand Competition 4. Anti-trust Issues 1. Introduction • Firms do not always sell their goods directly, they sell via retailers or wholesalers • Final goods are also produced in different stages by different firms • Firms are linked vertically and can take 2 forms: vertical merger or vertical restraints • Merger: when firms in different stage of the vertical process merge together (horizontal?) • Restraints: when firms in different stage of the vertical process have some form of contract and agreement between them • Both of the above are very common and can potentially be anti-competitive and welfare reducing 2 2. Intra-Brand Competition • Competition between retailers selling the same product • Generally this type of vertical restraints are welfare improving • We will now consider the welfare implications Double Marginalisation • Identified by Spengler (1950) • Without vertical merger or restraints, margins will be counted twice and price set too high • This leads to lower CS and lower profit • Assume there is 1 manufacturer (upstream firm: A) selling engine to a car producer (downstream firm: B) 2. Intra-Brand Competition Double Marginalisation (cont’d) • B buys engine at P A and add £C B cost of input to make car • ∴ AC B = MC B = P A + C B (why?) • It costs firm A £C A to produce the engine • ∴ AC A = MC A = C A • Demand curve of car if given as D B • The demand for engine (D A ) depends on the demand for car and is called the residual or derived demand • It can be derived as follows: • Equilibrium for downstream firm: MC B = MR B • ∴ MR B = P A + C B 2. Intra-Brand Competition Double Marginalisation (cont’d) • MR B = P A + C B • D A = AR A = P A = MR B – C B • D A and MR B are parallel (why?) • After vertical merger/restraint, price is lower and output higher • TS+CS are higher • What about technical efficiency? • The lower welfare level is also called vertical externalities • Firms in both stage should have monopoly power • Consider the case of manufacturer and retailer 3 2. Intra-Brand Competition Double Marginalisation (cont’d) £ Q Demand for car, D B MR for car, MR B C B C B MR for Engine, MR A DD for Engine, D A P A MC for car, MC...
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lec4_col - 1 Business and Government Lecture 4 Vertical...

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