Pre-emptive mergers and downstream cost asymmetry

With sufficient downstream cost asymmetry a horizontal merger will be chosen over a vertical merger. This results because the technology transfer is large and the incentive to vertically merge shrinks as the horizontal merger eliminates a cost asymmetry induced “bottleneck.” •The paper uniquely models pre-emptive mergers in which downstream costs differ.•When the downstream cost difference is large enough, the horizontal merger dominates.•This reverses the finding that vertical integration dominates for identical downstream costs.•When downstream products are complements, the upstream firm rarely bids.•This failure reflects the upstream firm’s gain from the horizontal merger eliminating a bottleneck.