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Downstream mergers and producer's capacity choice: why bake a larger pie when getting a smaller slice?
Author(s) -
Montez João V.
Publication year - 2007
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.0741-6261.2007.00120.x
Subject(s) - downstream (manufacturing) , upstream (networking) , upstream and downstream (dna) , economics , microeconomics , industrial organization , business , operations management , computer science , telecommunications
In this article, the effect of downstream horizontal mergers on the upstream producer's capacity choice was studied. Contrary to conventional wisdom, I find a nonmonotonic relationship: horizontal mergers induce a higher upstream capacity if the cost of capacity is low, and a lower upstream capacity if this cost is high. This result is explained by decomposing the total effect into two competing effects: a change in holdup and a change in bargaining erosion.