ch17 - Vertical and Conglomerate Mergers Chapter 17...

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Chapter 17: Vertical and Conglomerate Mergers 1 Vertical and Conglomerate Mergers
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Chapter 17: Vertical and Conglomerate Mergers 2 Introduction General Electric and Honeywell proposed to merge in 2000 GE supplies jet engines for commercial aircraft Honeywell produced various electrical and other control systems for jet aircraft Deal was approved in the US But was blocked by the EU Competition Directorate this was a merger of complementary firms it is “like” a vertical merger so can potentially remove inefficiencies in pricing benefiting the merged firms and consumers so why block the merger?
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Chapter 17: Vertical and Conglomerate Mergers 3 Introduction 2 Vertical mergers can be detrimental if they facilitate market foreclosure by the merged firms refuse to supply non-merged rivals But they can also be beneficial if they remove market inefficiencies Regulators need to look for the balance these two forces in considering any proposed merger
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Chapter 17: Vertical and Conglomerate Mergers 4 Complementary Mergers Consider first a merger between firms that supply complementary products A simple example: final production requires two inputs in fixed proportions one unit of each input is needed to make one unit of output input producers are monopolists final product producer is a monopolist demand for the final product is P = 140 - Q marginal costs of upstream producers and final producer (other than for the two inputs) normalized to zero. What is the effect of merger between the two upstream producers?
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Chapter 17: Vertical and Conglomerate Mergers 5 Complementary mergers 2 Supplier 1 Supplier 2 price v 1 price v 2 price P Final Producer Consumers
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Chapter 17: Vertical and Conglomerate Mergers 6 Complementary producers Consider the profit of the final producer: this is π f = (P - v 1 - v 2 )Q = (140 - v 1 - v 2 - Q)Q Maximize this with respect to Q ∂π f / Q = 140 - (v 1 + v 2 ) - 2Q = 0 Solve this for Q Q = 70 - (v 1 + v 2 )/2 This gives us the demand for each input Q 1 = Q 2 = 70 - (v 1 + v 2 )/2 So the profit of supplier 1 is then: π 1 = v 1 Q 1 = v 1 (70 - v 1 /2 - v 2 /2) Maximize this with respect to v 1
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Chapter 17: Vertical and Conglomerate Mergers 7 Complementary producers 2 Maximize this with respect to v 1 π 1 = v 1 Q 1 = v 1 (70 - v 1 /2 - v 2 /2) ∂π 1 / v 1 = 70 - v 1 - v 2 /2 = 0 Solve this for v 1 v 1 = 70 - v 2 /2 We can do exactly the same for v 2 v 2 = 70 - v 1 /2 The price charged by each supplier is a function of the other supplier’s price We need to solve these two pricing equations v 2 v 1 140 70 R 1 70 140 R 2 v 1 = 70 - (70 - v 1 /2)/2 = 35 + v 1 /4 so 3v 1 /4 = 35 so v 1 = $46.67 46.67 and v 2 = $46.67 46.67
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Chapter 17: Vertical and Conglomerate Mergers 8 Complementary products 3 Recall that Q = Q 1 = Q 2 = 70 - (v 1 + v 2 )/2 so Q = Q 1 = Q 2 = 23.33 units The final product price is P = 140 - Q =
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ch17 - Vertical and Conglomerate Mergers Chapter 17...

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