How Downstream Retailer Merger Affects Upstream Manufacture and Downstream Retail Markets? A Generalized Theorem and Applications to Different Market Types

Abstract

This paper studies how the merger of downstream retail firms shall affect the market structures in both the upstream manufacture and downstream retail markets. By allowing downstream retail firms to merge, this paper studies the upstream manufacture firms' endogenous choices of product qualities and downstream retail firms' endogenous choices of retail prices pre- and post-merger. The paper finds that the post-merger retail prices shall increase for both the merged and non-merging products. The market shares shall decrease for the merged products and shall increase for the non-merging products. The adjustments of post-merger product qualities shall depend on the pre-merger market shares, consumer's preference over product quality and upstream manufacture firms' marginal and fixed costs of production. A generalized theorem is provided to characterize conditions to predict all possible post-merger changes of market shares, product qualities and retail prices for both the merged and non-merging products, under the cases when retail firms sell either single or multiple products. The paper also applies the general theorem to study particular market types: information goods and service goods markets.