Merger remedies and bargaining power in the coffee market

This paper analyzes a merger of large manufacturers with divestiture in the French coffee market. In contrast to previous approaches used to study the effects of upstream divestitures on prices and welfare, we model the vertical market structure. First, our results show that the standard policy recommendation to require divestiture to small recipient firms may not hold when asymmetric bargaining power between firms is considered. Second, we show that previous models significantly overestimate costs. We estimate costs that are 41 percent lower, and find that divestiture can lead to marginal cost savings for the buyer of the divested brand.