Upstream horizontal mergers, vertical contracts, and bargaining ☆ Chrysovalantou Milliou a,1 , Emmanuel Petrakis b, ⁎ a Department of Economics, Universidad Carlos III de Madrid, Getafe (Madrid) 28903, Spain b Department of Economics, University of Crete, Rethymnon 74100, Greece Available online 11 January 2007 Abstract We study horizontal mergers in the upstream sectors of vertically related industries when bargaining is present and contract types are endogenous. We demonstrate that the contract types used can have significant implications for the equilibrium market structure and vice versa. When trading takes place through two-part tariff contracts, merger incentives are absent. However, when the downstream firms are powerful, merger incentives are restored since the merger leads then either to the exclusive or to the partial use of wholesale price contracts. Finally, we show that whenever a merger occurs, it is welfare detrimental. © 2006 Elsevier B.V. All rights reserved. JEL classification: L41; L42; L22 Keywords: Horizontal mergers; Bargaining; Vertical relations; Two-part tariffs; Wholesale prices; Merger policy 1. Introduction Many of the horizontal mergers that come before the antitrust agencies take place in vertically related industries. That is, they involve firms that trade not (only) with final consumers, but (also) with firms that operate at a different stage of the vertical production chain. The recent mergers among suppliers of intermediate products such as of car equipment (Kolben-schmidt/Pierburg, Available online at www.sciencedirect.com International Journal of Industrial Organization 25 (2007) 963 – 987 www.elsevier.com/locate/econbase ☆ We are grateful to Lluis Bru, Ramon Fauli-Oller, Esther Gal-Or, Marc Möller, Carlos Ponce, Nikolaos Vettas, the co-editor Joshua Gans and an anonymous referee for useful suggestions. We would like to thank seminar participants at CRETE 2005 at Syros, EARIE 2005 at Porto, XXI Jornadas de Economía Industrial at Bilbao, ASSET 2005 at Rethymnon, WZB at Berlin, IUI at Stockholm, and CERGE-EI at Prague for their comments. Full responsibility for all shortcomings is ours. ⁎ Corresponding author. Tel.: +30 2831077407. E-mail addresses: cmilliou@eco.uc3m.es (C. Milliou), petrakis@ermis.soc.uoc.gr (E. Petrakis). 1 Tel.: +34916249753. 0167-7187/$ - see front matter © 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.ijindorg.2006.11.007