Downstream mergers in vertically related markets with capacity constraints

Motivated by a recent merger proposal in the French outdoor advertising market, we de- velop a model in which firms are initially endowed with some advertising capacities and compete on two fronts. First, firms compete to acquire additional advertising capacities on an upstream market; a first stage modeled as a second-price auction with externali- ties. Second, those firms, privately informed on their own costs, use their capacities on the downstream market to supply advertisers whose demand is random; a second stage modeled by means of mechanism design techniques. We study the linkages between the equilibrium outcomes on both markets. When a firm is endowed with more initial capac- ity, through the acquisition of a competitor for instance, whether it becomes more or less eager to acquire extra capacity on the upstream market depends a priori on fine details of the downstream market. Under reasonable choices of functional forms, we demonstrate that a downstream merger does not create any bias in the upstream market towards the already dominant firm. Link to the article

MARTIMORT, D. and POUYET, J. (2020). Downstream mergers in vertically related markets with capacity constraints. International Journal of Industrial Organization, 72, pp. 102643.

Keywords : #Merger, #Vertically-related-markets, #Competition-with-capacity-constraints