An Empirical Model of Bargaining with Equilibrium of Fear: Application to Retail Mergers in the French Soft Drink Industry

We develop a framework of bilateral oligopoly with a sequential two-stage game in which manufacturers engage in bilateral bargains with retailers competing on a downstream market. We show that bargaining outcomes depend on three different bargaining forces and can be interpreted in terms of "equilibrium of fear". We estimate our framework using data on soft drink purchases in France and find that retailers have a higher bargaining power than manufacturers. Using counterfactual simulations, we highlight that retail mergers always increase retailers' fear of disagreement which weakens their bargaining power vis-à-vis manufacturers and leads to higher wholesale and retail prices