Horizontal Mergers in Multi-Tier Decentralized Supply Chains

Abstract

The well-known economic theory predicts that consumer price will fall after a horizontal merger when the amount of marginal cost reduction from operating synergies exceeds the pre-merger markup of a merging firm. However, when a horizontal merger occurs in a multi-tier decentralized supply chain where a finite number of firms compete at each tier, we show that this result holds only when a merger occurs at the tier that acts as the leader in the supply chain. In this supply chain, a horizontal merger at any other tier will decrease consumer price when the cost reduction exceeds a certain threshold that is larger than the pre-merger markup. Moreover, this threshold is increasing as the supply chain gets longer and can be substantially larger than the pre-merger markup. When accounting for subsequent entry after a merger in long-run equilibrium, contrary to a common belief, a larger synergy from a merger does not necessarily benefit consumers more.