CEBA talks 2020-2023
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Competitive Effects of Vertical Integration in Auctions

Authors: Andrey Tkachenko

Abstract: This paper studies the competitive effects of vertical integration between pharmaceutical drug producers and distributors in an auction setting. Utilizing data on 814,000 public procurement auctions in Russia, I identify the causal effect of vertical integration on the procurement prices of drugs. For drugs with few producers, vertical integration increases prices by 12%, while it decreases prices by 1.7% for drugs with many producers. I propose a model where distributors participating in a procurement auction negotiate with upstream producers. In the equilibrium, foreclosure explains the former empirical finding, while the exogenous synergy of the integration drives the latter effect. I use this model for the structural estimation of producer and distributor costs for drugs with two producers. Simulations show that a vertical merger with a synergy effect below 4% of the total cost harms the buyer. For a vertical merger with low synergy, the mandatory sharing of the production technology by the merging producer with a new independent firm is an effective remedy.