Horizontal Mergers in Multitier Decentralized Supply Chains

The well-known economic theory predicts that consumer price will fall after a horizontal merger when the amount of marginal cost reduction from operating synergies exceeds the premerger markup of a merging firm. However, when a horizontal merger occurs in a multitier decentralized supply chain where a finite number of firms compete at each tier, we show that this result holds only when a merger occurs at the tier that acts as the leader in the supply chain. In this supply chain, a horizontal merger at any other tier will decrease consumer price when the cost reduction exceeds a certain threshold that is larger than the premerger markup. Moreover, this threshold is increasing as the supply chain gets longer and can be substantially larger than the premerger markup. When accounting for subsequent entry after a merger in long-run equilibrium, contrary to a common belief, a larger synergy from a merger does not necessarily benefit consumers more. This paper was accepted by Yossiv Aviv, operations management.