Waterbed effects, 'gatekeepers' and buyer mergers

This paper demonstrates how a profitable downstream merger can lower the merged entity’s input price while raising that of its rivals, leading to an adverse effect on final consumers. This novel ‘waterbed’ result is very different to the unilateral and co-ordinated effects usually considered in the analysis of horizontal mergers. When demand is linear, all mergers involving a powerful buyer harm overall welfare even though the merger leads to marginal cost reductions that substantially increase output by the merged entity in the target market. The theory of harm is most likely to apply in relation to ‘gatekeeper’ retailers that control access to important downstream sales channels. While we would not advocate a presumption that waterbed effects are detrimental, competition authorities should be aware of this possible avenue of harm in light of the continued expansion by retail chains.