The global markets for coking coal and iron ore - Complementary goods, integrated mining companies and strategic behavior

- We investigate a merger when goods are complements and firms are Cournot oligopolists.
- We find that given unlimited capacities, a merger is always beneficial.
- There exists a critical capacity below which a merger does not increase total profits.
- In the iron ore and coking coal market, merged firms gain no substantial extra benefit.

The global market for coking coal is linked to the global market for iron ore since both goods are complementary inputs in pig iron production. Moreover, international trade of both commodities is highly concentrated, with only a few large companies active on both input markets. Given this setting, the paper presented investigates the strategy of quantity-setting (Cournot) mining companies that own both a coking coal and an iron ore division. Do these firms optimize the divisions' output on a firm level or by each division separately (division-by-division)? First, using a theoretical model of two Cournot duopolies of complementary goods, we find that there exists a critical capacity constraint below/above at which firm-level optimization results in identical/superior profits compared with division-level optimization. Second, by applying a spatial multi-input equilibrium simulation model of the coking coal and iron ore markets, we find that due to the limited capacity firms gain no (substantial) additional benefit from optimizing output on a firm level.