Browsing by Author "Minnie, Roan Johan"

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    Bargaining competition and vertical mergers
    (Stellenbosch : Stellenbosch University, 2022-04) Minnie, Roan Johan; Boshoff, Willem Hendrik; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Economics.
    ENGLISH SUMMARY: Vertically related markets and vertical mergers are complex systems that comprise a number of distinct features. The modelling of such complex systems involves several modelling choices that affect the predicted model outcomes. We rely on simulation-based methods to consider how choices of key model parameters, assumptions and industry structures map onto competitive outcomes in vertically related markets and for vertical mergers. Our simulation results can help guide practitioners in selecting models that best characterise the features of a given vertical relationship, especially since assumptions that distinguish the models from one another — how and over what parties bargain — are typically not observed. In particular, this dissertation studies vertically related markets and vertical mergers along three dimensions. Firstly, we focus on comparing alternative models of vertical competition, based on different assumptions regarding the nature and object of vertical contracting. As far as the nature of vertical contracting is concerned, models may assume upstream and downstream firms reaching agreement through take-it-or-leave-it offers, bargaining or recursive bargaining. As far as the object of vertical contracting is concerned, models may assume vertical contracting is over linear prices (a marginal wholesale price) or two-part prices (a marginal wholesale price and a fixed f ee). We systematically compare the corpus of models of vertically related markets across two simple industry structures (‘1 _ 2’, one upstream and two downstream firms; and ‘2_1’, two upstream and one downstream firm) to allow direct comparisons. Our comparisons show that in a linear pricing setting, a modelling choice between bargaining and recursive bargaining is irrelevant to the outcome. In two-part pricing, however, bargaining leads to a more competitive outcome than the joint profit maximising outcome under recursive bargaining. Secondly, we study and compare models for vertical merger analysis, in order to investigate how assumptions regarding vertical contracting map onto observable merger effects. We also examine the extent to which predictions from models of vertical mergers are robust to different specifications of substitutability. In particular, we compare models calibrated to an increasing aggregate elasticity (i.e. the substitutability of the inside goods with the outside good) with models calibrated to the nest strength parameter of the demand function. Our results show that the predicted merger effects from different models are consistent for the two measures of substitutability. The results also illustrate that modelling choices such as the specification of the industry structure or object and nature of vertical contracting that determined outcomes in the pre-merger world, can also predetermine post-merger outcomes. Lastly, we introduce a vertical merger simulator tool to allow an assessment of vertical merger scenarios in practice. We illustrate the utility of the simulator as a screening tool by reference to a number of examples reflecting modelling choices often faced by practitioners. In this regard, we illustrate three examples where the exogenous variables of interest are the marginal cost of the upstream firm and downstream firms, the market shares and the prices of the downstream firms respectively. We compare the simulator to incentive scoring methods (comprising of various upward pricing pressure indices), which have received extensive attention in literature and policy circles as a screening tool for merger effects, including for vertical mergers. While direct comparisons are challenging, it is evident that the data requirements of our vertical merger simulator are not particularly onerous compared to those of incentive scoring indices. The simulator offers the additional benefit of full equilibrium analysis, compared to the partial equilibrium focus of incentive scoring methods. We conclude that the simulator can be a useful complementary tool for vertical merger screening.