Vertical Mergers with Input Substitution: Double Marginalization, Foreclosure and Welfare

Abstract We consider differentiated duopolists that face symmetric linear demands and produce using Cobb–Douglas technologies with a monopolized input and a competitively supplied input. A merger between the input monopolist and either firm eliminates double marginalization but—unlike with fixed-proportions technologies—can lead to foreclosure and reduce welfare. The same can occur under a CES technology with greater input substitutability than Cobb–Douglas. With identical Cobb–Douglas technologies, the merged firm raises the rival’s cost by more, and the welfare effects are worse, when the input it controls constitutes a low rather than high share of input costs. With different technologies, the welfare effects can be non-monotonic in that input’s share of costs.