Modeling the Effects of Mergers in the Retail Sector

A Parsimonious Multilateral Approach

Publikation: Bidrag til bog/antologi/rapportBidrag til bog/antologiForskningpeer review

Resumé

According to EU competition law, mergers that significantly impedes effective competition, particularly by creating or strengthening a dominant position are prohibited. To identify these cases, authorities need a quantifiable model of the relationship between the variables that are affected by the merger and some measure of competition. Furthermore, the authorities must make their decision quickly, rendering deliberate data collection and econometric analyses infeasible in practice. The decision must be based on easily accessible data. In this paper, a simple model of the interaction between the retail and wholesale markets is constructed, calibrated and simulated based on a concrete case (the acquisition and merger of 250 shops previously organized in a voluntary chain of shops comprising roughly half of the market for high-end cosmetics in Denmark). Model simulations predicts that the merger would most likely significantly affect retail prices. The harmful effects are markedly intensified through the possible abuse of buyer power to raise barriers to the market and curb the competitiveness of minor rivals. However, the dominant position is vulnerable if increased profits induce the entrance to the sector of more independent competitors. The competition authorities were justified in conditioning its approval on the removal of contract-based barriers to entry. Analytically, the main results of this work are the following: (1) In a linear model characterized by heterogeneous products and constant marginal costs, the optimal (Nash equilibrium) wholesale price is unaffected by the structure in the retail sector. (2) The effect of buyer power- induced quantity discounts depends crucially on the specific design of the rebate scheme: A relative discount on the list price that the independent shops are charged increases the average retail price, whereas a fixed reduction relative to the pre-merger price reduces the average retail price. (3) Buyer power-induced retail pricemaintenance (RPM) increases the average retail price. RPM increases the competitiveness and profits of the merged shops only if the producers keep the wholesale prices unchanged. If the producers adjust their wholesale prices, then RPM hurts both the merged and the independent shops and benefits only the producers. The harmful effects on consumer welfare and efficiency are intensified.
OriginalsprogEngelsk
TitelEconomics of Competition
RedaktørerGeorg Leismuller, Elias J. Schimpf
Udgivelses stedNew York
ForlagNova Science Publishers
Publikationsdato2013
Sider75-104
Kapitel5
ISBN (Trykt)9781622574162
StatusUdgivet - 2013
NavnEconomic Issues, Problems and Perspectives

Bibliografisk note

Også udgivet i International Journal of Energy, Environment, and Economics, 2012, Vol. 20, nr. 4, p. 331-354

Citer dette

Blomgren-Hansen, N. (2013). Modeling the Effects of Mergers in the Retail Sector: A Parsimonious Multilateral Approach. I G. Leismuller, & E. J. Schimpf (red.), Economics of Competition (s. 75-104). New York: Nova Science Publishers. Economic Issues, Problems and Perspectives
Blomgren-Hansen, Niels. / Modeling the Effects of Mergers in the Retail Sector : A Parsimonious Multilateral Approach. Economics of Competition. red. / Georg Leismuller ; Elias J. Schimpf. New York : Nova Science Publishers, 2013. s. 75-104 (Economic Issues, Problems and Perspectives).
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title = "Modeling the Effects of Mergers in the Retail Sector: A Parsimonious Multilateral Approach",
abstract = "According to EU competition law, mergers that significantly impedes effective competition, particularly by creating or strengthening a dominant position are prohibited. To identify these cases, authorities need a quantifiable model of the relationship between the variables that are affected by the merger and some measure of competition. Furthermore, the authorities must make their decision quickly, rendering deliberate data collection and econometric analyses infeasible in practice. The decision must be based on easily accessible data. In this paper, a simple model of the interaction between the retail and wholesale markets is constructed, calibrated and simulated based on a concrete case (the acquisition and merger of 250 shops previously organized in a voluntary chain of shops comprising roughly half of the market for high-end cosmetics in Denmark). Model simulations predicts that the merger would most likely significantly affect retail prices. The harmful effects are markedly intensified through the possible abuse of buyer power to raise barriers to the market and curb the competitiveness of minor rivals. However, the dominant position is vulnerable if increased profits induce the entrance to the sector of more independent competitors. The competition authorities were justified in conditioning its approval on the removal of contract-based barriers to entry. Analytically, the main results of this work are the following: (1) In a linear model characterized by heterogeneous products and constant marginal costs, the optimal (Nash equilibrium) wholesale price is unaffected by the structure in the retail sector. (2) The effect of buyer power- induced quantity discounts depends crucially on the specific design of the rebate scheme: A relative discount on the list price that the independent shops are charged increases the average retail price, whereas a fixed reduction relative to the pre-merger price reduces the average retail price. (3) Buyer power-induced retail pricemaintenance (RPM) increases the average retail price. RPM increases the competitiveness and profits of the merged shops only if the producers keep the wholesale prices unchanged. If the producers adjust their wholesale prices, then RPM hurts both the merged and the independent shops and benefits only the producers. The harmful effects on consumer welfare and efficiency are intensified.",
author = "Niels Blomgren-Hansen",
note = "Also published in International Journal of Energy, Environment, and Economics, 2012, Vol. 20, nr. 4, p. 331-354",
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Blomgren-Hansen, N 2013, Modeling the Effects of Mergers in the Retail Sector: A Parsimonious Multilateral Approach. i G Leismuller & E J. Schimpf (red), Economics of Competition. Nova Science Publishers, New York, Economic Issues, Problems and Perspectives, s. 75-104.

Modeling the Effects of Mergers in the Retail Sector : A Parsimonious Multilateral Approach. / Blomgren-Hansen, Niels.

Economics of Competition. red. / Georg Leismuller; Elias J. Schimpf. New York : Nova Science Publishers, 2013. s. 75-104 (Economic Issues, Problems and Perspectives).

Publikation: Bidrag til bog/antologi/rapportBidrag til bog/antologiForskningpeer review

TY - CHAP

T1 - Modeling the Effects of Mergers in the Retail Sector

T2 - A Parsimonious Multilateral Approach

AU - Blomgren-Hansen, Niels

N1 - Also published in International Journal of Energy, Environment, and Economics, 2012, Vol. 20, nr. 4, p. 331-354

PY - 2013

Y1 - 2013

N2 - According to EU competition law, mergers that significantly impedes effective competition, particularly by creating or strengthening a dominant position are prohibited. To identify these cases, authorities need a quantifiable model of the relationship between the variables that are affected by the merger and some measure of competition. Furthermore, the authorities must make their decision quickly, rendering deliberate data collection and econometric analyses infeasible in practice. The decision must be based on easily accessible data. In this paper, a simple model of the interaction between the retail and wholesale markets is constructed, calibrated and simulated based on a concrete case (the acquisition and merger of 250 shops previously organized in a voluntary chain of shops comprising roughly half of the market for high-end cosmetics in Denmark). Model simulations predicts that the merger would most likely significantly affect retail prices. The harmful effects are markedly intensified through the possible abuse of buyer power to raise barriers to the market and curb the competitiveness of minor rivals. However, the dominant position is vulnerable if increased profits induce the entrance to the sector of more independent competitors. The competition authorities were justified in conditioning its approval on the removal of contract-based barriers to entry. Analytically, the main results of this work are the following: (1) In a linear model characterized by heterogeneous products and constant marginal costs, the optimal (Nash equilibrium) wholesale price is unaffected by the structure in the retail sector. (2) The effect of buyer power- induced quantity discounts depends crucially on the specific design of the rebate scheme: A relative discount on the list price that the independent shops are charged increases the average retail price, whereas a fixed reduction relative to the pre-merger price reduces the average retail price. (3) Buyer power-induced retail pricemaintenance (RPM) increases the average retail price. RPM increases the competitiveness and profits of the merged shops only if the producers keep the wholesale prices unchanged. If the producers adjust their wholesale prices, then RPM hurts both the merged and the independent shops and benefits only the producers. The harmful effects on consumer welfare and efficiency are intensified.

AB - According to EU competition law, mergers that significantly impedes effective competition, particularly by creating or strengthening a dominant position are prohibited. To identify these cases, authorities need a quantifiable model of the relationship between the variables that are affected by the merger and some measure of competition. Furthermore, the authorities must make their decision quickly, rendering deliberate data collection and econometric analyses infeasible in practice. The decision must be based on easily accessible data. In this paper, a simple model of the interaction between the retail and wholesale markets is constructed, calibrated and simulated based on a concrete case (the acquisition and merger of 250 shops previously organized in a voluntary chain of shops comprising roughly half of the market for high-end cosmetics in Denmark). Model simulations predicts that the merger would most likely significantly affect retail prices. The harmful effects are markedly intensified through the possible abuse of buyer power to raise barriers to the market and curb the competitiveness of minor rivals. However, the dominant position is vulnerable if increased profits induce the entrance to the sector of more independent competitors. The competition authorities were justified in conditioning its approval on the removal of contract-based barriers to entry. Analytically, the main results of this work are the following: (1) In a linear model characterized by heterogeneous products and constant marginal costs, the optimal (Nash equilibrium) wholesale price is unaffected by the structure in the retail sector. (2) The effect of buyer power- induced quantity discounts depends crucially on the specific design of the rebate scheme: A relative discount on the list price that the independent shops are charged increases the average retail price, whereas a fixed reduction relative to the pre-merger price reduces the average retail price. (3) Buyer power-induced retail pricemaintenance (RPM) increases the average retail price. RPM increases the competitiveness and profits of the merged shops only if the producers keep the wholesale prices unchanged. If the producers adjust their wholesale prices, then RPM hurts both the merged and the independent shops and benefits only the producers. The harmful effects on consumer welfare and efficiency are intensified.

M3 - Book chapter

SN - 9781622574162

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PB - Nova Science Publishers

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ER -

Blomgren-Hansen N. Modeling the Effects of Mergers in the Retail Sector: A Parsimonious Multilateral Approach. I Leismuller G, J. Schimpf E, red., Economics of Competition. New York: Nova Science Publishers. 2013. s. 75-104. (Economic Issues, Problems and Perspectives).