1 Upstream competition and buyer mergers

This paper analyses buyer mergers in the presence of upstream competition to supply imperfect substitutes. A likely consequence of imperfect substitutes is that buyers, following disagreement with some of their suppliers, can renegotiate with other suppliers. There are thus two different channels through which large buyers can obtain more favourable terms from their suppliers. On the one hand, as stated in the literature on buyer power, large buyers receive a discount if the suppliers ’ marginal costs are increasing. On the other hand, buyer power is related to increasing the outside options of the buyer. The present study provides a fuller picture of the circumstances under which large buyers are more likely to obtain a discount. In such a framework, size discounts arise even if suppliers ’ marginal costs are decreasing. Moreover, some examples are given here to illustrate a number of industry scenarios. The idea is to derive situations in which buyer mergers would not occur unless the buyer industry exceeds a certain concentration at the outset. In this way, it is possible to characterize a lower threshold for the degree of buyer concentration