Consumer Harm from the Waterbed Effect: A Comment on Inderst and Valletti (2011)

Abstract

Inderst and Valletti (2011, henceforth IV) argue that a merger of downstream buyers can locally harm consumers through the 'waterbed effect.' Their Proposition 6 gives a sufficient condition for consumer surplus to fall at the margin. IV verify that a related condition, sufficient for the small firm's retail price to rise, is non-empty. They never check the consumer-harm condition itself. I check it. On IV's both-binding Hotelling path, the consumer-harm condition is empty: it holds at no asymmetric equilibrium of the supplier's problem. Proposition 3, which says the large buyer pays a lower wholesale price than the small rival, is unaffected.