Analyzing merger effects on input prices when prices are negotiated

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This chapter explores factors to be considered when analyzing the effects of mergers on input prices when prices are negotiated. While most merger analysis tends to be focused on effects on customers, there seems to be increasing attention in antitrust circles to monopsony effects, i.e., the possible effects on input suppliers.

The chapter is organized as follows. After a review in Section 6.02 of the Nash Bargaining Model—the standard model used by economists to analyze bargaining effects—Section 6.03 reviews different models of how a merger could reduce input prices when prices are negotiated. These models can be surprisingly subtle. For example, it is frequently suggested that if a merger consolidates the purchases of a given input, then the merged firm will have greater “clout” and should be able to negotiate for lower prices. Section 6.03 shows that while this expectation can be correct, it is not necessarily correct in all circumstances. The section also briefly reviews the empirical evidence on the relationship between buyer size and prices paid and finds that the results are mixed. It is not the case that the evidence consistently shows that increases in buyer size are associated with lower prices paid.

The chapter concludes with a discussion of the implications for merger analysis if the affected market is one where input prices are negotiated and there is in fact reason to believe that the merger will put downward pressure on negotiated input prices. By one view, a merger-related reduction in the prices received by input suppliers is as problematic as a merger-related increase in the prices paid by customers. But what if the reduction in negotiated input prices does in fact reduce the merged firm’s marginal costs and allows it to compete more effectively on downstream markets, in the process putting downward pressure on the prices paid by customers? Indeed, many merging firms have argued that, because lower input prices will allow them to compete more effectively in downstream markets, an ability to negotiate for lower input prices following a merger should be regarded as a merger cost saving.

This chapter appears in the 2023 edition of Antitrust Economics for Lawyers. For more information, click here.

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