Up or Down? The Price Effects of Mergers of Intermediaries

Antitrust Law Journal 82 (2019) 643–677

Intermediaries purchase from upstream suppliers and sell to consumers. Given the positions of intermediaries in the middle of supply chains, the impact of a merger of intermediaries on prices in output markets may depend on the impact of the merger in input markets. Making sense of intermediary mergers thus requires a comprehensive analysis that ties together negotiations with upstream suppliers in input markets with downstream competition for consumers in output markets.

In a new article in the Antitrust Law Journal, Analysis Group Affiliate David Dranove, Managing Principal Dov Rothman, and Vice President David Toniatti offer a framework for measuring the impact of a merger of intermediaries. In “Up or Down? The Price Effects of Mergers of Intermediaries,” the three authors present a model in which intermediaries’ input and output prices are determined simultaneously. The authors conclude that a merger of intermediaries is more likely to result in lower output prices if three conditions hold:

  • The upstream market is not very competitive and the downstream market is highly competitive
  • The merging entities are not close competitors
  • For the consumers who would switch from one merging intermediary to the other if the merging intermediary does not reach an agreement with an upstream supplier, few of these consumers would switch from a merging intermediary to a non-merging intermediary if both merging intermediaries do not reach agreements with the upstream supplier

The authors conclude that it is unlikely that all three conditions are satisfied in many markets. They apply this model to the proposed merger between health insurers Anthem and Cigna, and find that even with the input-price reductions claimed by the insurers, the merger likely would have led to higher output prices in all of the markets contested by the government.

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Dranove D, Rothman D, Toniatti D