A Theory of Bilateral Oligopoly , With Applications to Vertical Mergers

In horizontal mergers, concentration is often measured with the HirschmannHerfindahl Index (HHI). This index yields the price-cost margins in Cournot competition. In many modern merger cases, both buyers and sellers have market power, and indeed, the buyers and sellers may be the same set of firms. In such cases, the HHI is inapplicable. We develop an alternative theory that has similar data requirements as the HHI, applies to intermediate good industries with market power on both sides, and specializes to the HHI when buyers have no market power. The more inelastic is the downstream demand, the more captive production and consumption (not traded in the intermediate market) affects price/cost margins. The analysis is applied to the merger of the California gasoline refining and retail assets of Exxon and Mobil. ∗ Department of Economics, University of British Columbia, Vancouver B.C. V3X 1Z1 CANADA and Department of Economics, University of Texas, Austin, TX 78712, respectively. We thank Jeremy Bulow and Paul Klemperer for useful remarks and for encouraging us to explore downstream concentration.