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Mergers under Exclusive Dealing : An Empirical Analysis of the Fuel Industry

An exclusive dealing (ED) contract between two firms stipulates that one cannot deal with the competitors of the other. Since under ED the supplier is not competing to sell to its exclusive retailers, it is not obvious whether a merger of suppliers would have any effect on competition. In this paper, I propose and estimate a structural model featuring individual consumer’s demand, spatial competition among retailers, and vertical negotiations between suppliers and exclusive retailers. The model predicts that, following an upstream merger, the consolidation of exclusive dealing networks creates incentives for the merged supplier to increase wholesale prices. This price increase is proportional to the diversion ratios within the network of exclusivity and affects exclusive dealers asymmetrically. I estimate the model using a novel panel dataset on the Brazilian fuel industry containing detailed information about vertical transactions. The data span a period which includes an important merger, permitting an ex-post evaluation of the simulation. The simulation predicts an average increase of 30% in the wholesale margins of the merged suppliers, while only a small increase in the margins of the non merged. Actual data confirms the predicted increase in the wholesale margins, as well as the difference in the wholesale price increase between the merged and non-merged firms.