To Merge or to Help Related Firms Merge? Vertical Mergers in Cournot Oligopolies with Complementary Inputs

Wei-Jen Wen, Wen-Chieh Lee, and Vincent K. C. Chen


Consider a successive oligopoly where the production of a final good requires two complementary inputs: one essential input produced by a sole supplier and one generic input produced by oligopolistic suppliers. We compare the profitability of two strategies for the essential input supplier: one is to help related firms merge vertically; the other is to acquire a downstream firm itself. We show that it is in the interest of the essential in-put supplier to subsidize a fraction of firms in the market to merge vertically when there are few related firms, as these subsidized mergers can trigger further vertical mergers and lead to the maximum number of pairwise vertical mergers whereby the monopolis-tic supplier can grasp the bulk of the efficiency gains stemming from eliminating double marginalization. In contrast, it is more profitable for the essential input supplier to ac-quire a downstream firm and foreclose other downstream competitors when the number of related firms is large, as the subsidization required by the first strategy grows with the number of the related firms.