The welfare gains from a refusal to deal

ABSTRACT

A vertically integrated provider (VIP) initially has a duty to deal with a rival at unregulated upstream and downstream prices. The duty to deal is subsequently terminated which enables the VIP to acquire the rival and serve as a two-product, downstream monopolist. We find that the refusal to deal is welfare-enhancing given that consumer and producer surplus increase.

KEYWORDS:

• Vertical integration
• duty to deal
• efficiency
• antitrust

JEL CLASSIFICATION:

• L51
• L96

Acknowledgments

We are grateful to Dong Li and Glen Robinson for helpful discussions and thank an anonymous referee for constructive suggestions for revision that improved the manuscript.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Carlton (2001) investigates different cases of refusals to deal and cautions that antitrust enforcement may harm competition when dominant firms have the incentive and ability to preserve and extend market power. Farrell and Shapiro (1990) find that a sufficient condition for a horizontal merger to increase welfare is that it reduces prices. Werden (1996) shows that sufficiently large post-merger cost reductions in differentiated-product industries can offset the tendency of a horizontal merger to increase prices. See also Williamson (1968) for an examination of the efficiency gains sufficient for a horizontal merger to be welfare enhancing.

² It is straightforward to show that $\frac{\mathrm{\partial }V}{\mathrm{\partial }{P}_1}=P_1-\delta P_2-1=-Q_1<0$ and $\frac{\mathrm{\partial }V}{\mathrm{\partial }{P}_2}=P_2-\delta P_1-1=-Q_2<0.$

³ The asterisk on a variable indicates equilibrium values.

⁴ In the DTD market structure, double marginalization raises $P_2$ and, in turn, $P_1$ since $\delta >0.$ Conversely, in a price-leader/follower model $P_1$ is unchanged following the refusal to deal (Weisman and Nadimi 2019).

⁵ Because changes in δ shift the demand curves, prices are not comparable across different values of δ. Nonetheless, prices are comparable across different market structures (DTD and TPM) for any given $\delta$.

⁶ In contrast, profit gains, consumer surplus gains and therefore welfare gains in the transition from the DTD to the TPM market structure are decreasing in $k$. The proof is immediate upon differentiating price and total profit differences with respect to $k$.

⁷ Policymakers may prefer more than one market provider despite the static efficiency losses. These results suggest that the social cost of such a pro-rivalry policy is increasing in $\delta$.