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Backward Integration by a Dominant Firm

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  • Laurent Linnemer

Abstract

This paper studies the welfare consequences of a vertical merger that raises rivals' costs when downstream competition is a la Cournot between firms with constant asymmetric marginal costs. The main result is that such a vertical merger can nevertheless improve welfare if it involves a downstream firm whose cost is low enough. This is because by raising the input price paid by the nonmerging firms the merger shifts production away from those relatively inefficient producers in favor of the more efficient firm. Yet, there is a trade-off between the gain in productive efficiency and the loss in consumers' surplus caused by the higher downstream price that follows a higher input price. It is also shown, through an example, that this result extends to price competition with differentiated products. Copyright (c) 2003 Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 12 (2003)
Issue (Month): 2 (06)
Pages: 231-259

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Handle: RePEc:bla:jemstr:v:12:y:2003:i:2:p:231-259

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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Cited by:
  1. Ahmad Reza Saboori Memar & Georg Götz, 2013. "R&D Incentives in Vertically Related Markets," MAGKS Papers on Economics 201307, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Stefen Buehler & Armin Schmutzler, 2004. "Downstream Investment In Oligopoly," Royal Economic Society Annual Conference 2004 9, Royal Economic Society.
  3. Thomas, Charles J., 2011. "Vertical mergers in procurement markets," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 200-209, March.
  4. Noriaki Matsushima & Tomomichi Mizuno, 2010. "How do market structures affect decisions on vertical integration/separation?," ISER Discussion Paper 0770, Institute of Social and Economic Research, Osaka University.
  5. Fevrier, Philippe & Linnemer, Laurent, 2004. "Idiosyncratic shocks in an asymmetric Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 835-848, June.
  6. Wang, X. Henry & Zhao, Jingang, 2007. "Welfare reductions from small cost reductions in differentiated oligopoly," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 173-185, February.
  7. Pedro Mendi, 2009. "Backward integration and collusion in a duopoly model with asymmetric costs," Journal of Economics, Springer, vol. 96(2), pages 95-112, March.

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