The strategic effects of a merger upon supplier interactions

We consider how a merger between two naturally differentiated dealers affects their interactions with a common supplier and identify conditions under which the merger can increase or decrease the combined net worth of the two firms. Among other things, we find that the attractiveness of merging depends upon the extent to which end demand can be stimulated by either an upstream supplier or the dealers. Specifically, the greater the supplier's ability to invest in stimulating end demand, the more likely it is that the naturally differentiated firms will be better off operating independently than merging. On the other hand, if the greatest opportunities for stimulating demand are through the service that is provided by the dealers, then merging their operations will be more attractive.