Upstream horizontal mergers, vertical contracts, and bargaining

We study horizontal mergers in the upstream sectors of vertically related industries when bargaining is present and contract types are endogenous. We demonstrate that the contract types used can have significant implications for the equilibrium market structure and vice versa. When trading takes place through two-part tariff contracts, merger incentives are absent. However, when the downstream firms are powerful, merger incentives are restored since the merger leads then either to the exclusive or to the partial use of wholesale price contracts. Finally, we show that whenever a merger occurs, it is welfare detrimental.