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: n.gooroochurn@londonmet.ac.uk 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 (contd) 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 (contd) 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 (contd) 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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