Pre-emptive mergers and downstream cost asymmetry

- The paper uniquely models pre-emptive mergers in which downstream costs differ.
- When the downstream cost difference is large enough, the horizontal merger dominates.
- This reverses the finding that vertical integration dominates for identical downstream costs.
- When downstream products are complements, the upstream firm rarely bids.
- This failure reflects the upstream firm's gain from the horizontal merger eliminating a bottleneck.

With sufficient downstream cost asymmetry a horizontal merger will be chosen over a vertical merger. This results because the technology transfer is large and the incentive to vertically merge shrinks as the horizontal merger eliminates a cost asymmetry induced “bottleneck.”