Downstream mergers and producer's capacity choice: why bake a larger pie when getting a smaller slice?


  • I am particularly thankful to Dezsö Szalay, Thomas von Ungern-Sternberg, and Lucy White. I would also like to thank Jose Anson, Roman Inderst, John Moore, Christopher Snyder, Raymond Deneckere (the editor), an anonymous referee, and participants at the Conference in Tribute to Jean-Jacques Laffont 2005 in Toulouse, EEA 2005 in Amsterdam, SGVS 2006 in Lugano, IIOC 2006 in Boston, ICGT 2006 at Stony Brook, University of Bern, University of Lausanne, and Columbia University seminars. Financial support from the FCT (Portuguese National Science Foundation) and Swiss National Science Foundation is gratefully acknowledged.


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.