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.
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