We study horizontal mergers in the upstream sector of a vertically related industry in which firms bargain over their contract terms. We demonstrate that the contract type is crucial for the merger incentives and the merger effects. When trading takes place through two-part tariff contracts, and not through wholesale price contracts, upstream firms have no incentives to merge. When the contract type is endogenous and the upstream bargaining power is sufficiently low, merger incentives are present and wholesale price contracts are chosen in equilibrium. Finally, upstream horizontal mergers can be procompetitive even in the absence of efficiency gains.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The working papers published in the Series constitute work in progress circulated to stimulate discussion and critical comments. Views expressed represent exclusively the authors' own opinions and do not necessarily reflect those of the editor. Cournot competition yields higher output, lower wholesale prices, lower …nal prices, higher consumers'surplus, and higher total welfare than Bertrand competition. Terms of use: Documents in

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may

In this paper, we provide an explanation for why upstream firms merge, highlighting the role of R&D investments and their nature, as well as the role of downstream competition. We show that an upstream merger generates two distinct efficiency gains when downstream competition is not too strong and R&D investments are sufficiently generic: The merger increases R&D investments and decreases wholesale prices. We also show that upstream firms merge unless R&D investments are too specific and downstream competition is neither too weak nor too strong. When the merger materializes, the merger-generated efficiencies pass on to consumers, and thus, consumers can be better off.to consumers. In other words, typically mergers among manufacturers involve firms that operate in the upstream sectors of vertically related industries.One of the recent concerns of the antitrust authorities in the treatment of mergers between manufacturers is whether they should take vertical relationships into account (see e.g., Scheffman and Coleman, 2002;Froeb et al., 2004 Froeb et al., , 2007. That is, whether they should consider the downstream behavior when they examine upstream merger proposals. Such a concern is mainly motivated by the recent increase in retail concentration, which implies that the assumption of many studies examining manufacturer mergers that retailers are passive is quite unrealistic.In this paper, we study upstream mergers in vertically related industries. A key aspect of our analysis is that we allow for R&D investments and we consider the role of their nature, whether they are specific or generic. Two additional key aspects of our analysis are that we endogenize the contract types used in vertical trading and we take into account downstream competition and its intensity. We address a number of questions such as: Why and when upstream firms merge? Do upstream mergers lead to efficiency gains? How do they influence vertical trading? Are their potential efficiency gains passed on to consumers? Do upstream mergers harm welfare?In our model, there are initially two upstream and two downstream firms with exclusive relations among them. In the outset, the upstream firms decide whether they will merge. Next, they choose among trading through wholesale price contracts or two-part tariff contracts, they invest in R&D and they set the contract terms. 2 Finally, the downstream firms compete in quantities. We allow for various degrees of R&D investments' specificity. If the R&D investments are fully specific, they can be used in the production of the input of just one downstream firm. Otherwise, they can be used in the production of the inputs of both downstream firms.We find that a merger can alter the equilibrium contract types. Premerger, firms trade always through two-part tariff contracts. Two-part tariff contracts, in contrast to wholesale price contracts, do not result into double marginalization and they maximize the vertical chain's profits. Postmerger, firms trade through two-part tariffs only when products are not too cl...