Waterbed Effects and Buyer Mergers

CCP Working Paper No. 05-7

25 Pages Posted: 27 Jun 2006

Date Written: June 2005

Abstract

This paper demonstrates how a profitable, downstream merget can lower the merged entity's input price while raising that of its rivals, leading to an adverse effect on final consumers. This novel 'waterbed' result is surprising and very different to the unilateral and co-ordinated effects usually considered in the analysis of horizontal mergers. When demand is linear, all mergers involving a powerful buyer harm overall welfare even though the merger leads to marginal cost reductions that substantially increase output by the merged entity.

Keywords: Mergers, buyer power, raising rivals' costs

JEL Classification: L40, D43

Suggested Citation

Majumdar, Adrian N., Waterbed Effects and Buyer Mergers (June 2005). CCP Working Paper No. 05-7, Available at SSRN: https://ssrn.com/abstract=911574 or http://dx.doi.org/10.2139/ssrn.911574

Adrian N. Majumdar (Contact Author)

RBB Economics ( email )

London WC1V 7BD
United Kingdom