Upstream Horizontal Mergers and E ¢ ciency Gains

We study horizontal mergers in upstream markets and their potential e ¢ ciency gains. We explore the incentives for such mergers, their impact on R&D investments, as well as the interaction in terms of welfare between their potentially e ¢ ciency-enhancing e¤ects and their anti-competitive e¤ects. We show that when trading takes place through two-part tari ¤ contracts, an upstream horizontal merger can give rise to two distinct e ¢ ciency-enhancing e¤ects. It can increase the R&D investments and decrease the wholesale prices. Most of the times, when \u85rms merge usually both of these e ¢ ciencies are realized and thus the merger is pro-competitive. When \u85rms trade using wholesale price contracts, upstream rms always merge. There are two opposite e ¢ ciency e¤ects in place then. The merger increases the e¤ective R&D investments but it also aggravates the severity of the double marginalization problem. Which of the two e¤ects prevails for the mergers welfare impact depends mainly on the intensity of downstream competition