Economics Research Seminar Series: Simon Loertscher

Vertical integration with incomplete information. Prof. Simon Loertscher, University of Melbourne.

This paper derives the social surplus maximizing vertical merger policy for an incomplete information model in which the upstream market structure affects the efficiency of the intermediate good market. This policy allows some vertical mergers to pass unopposed, imposes divestiture remedies on others, and blocks the remaining ones. With ex-ante identical firms, more symmetric market structures increase social surplus both before and after a merger with divestiture. If mergers consist of bilateral transactions of upstream ownership ex-ante, then a laissez-faire policy maximizes social surplus with two firms but, because of bargaining externalities, typically not otherwise. Firms' investment incentives are aligned with the first-best if the upstream market structure permits the market to operate efficiently. Assuming that the intermediate good improves the quality of the product that each firm sells in its downstream market, consumer and social surplus maximization are equivalent if the pass-through is the same across markets

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