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Vertical Integration, Foreclosure, and profits in the Presence of Double Marginalization

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Author Info
Géarard Gaudet
Ngo Long

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Abstract

Whether vertical integration between a downstream oligopolist and an upstream oligopolist is profitable for an integrated pair of firms is shown to depend on whether one means by this that profits increase no matter what other firms do, that all integrated firms are better off when all firms are integrated than when none are, or simply that no downstream-upstream pair of firms has an incentive to deviate from a situation where all firms are integrated. It is also shown to depend on the number of firms in each oligopoly and on the type of interaction that is assumed between firms that are integrated and firms that are not. In particular, it is shown that if no restriction is put on trade between integrated and nonintegrated firms, integrated firms may continue to purchase inputs from the nonintegrated upstream firms, with the goal of raising their downstream rivals' costs. Furthermore, even though firms are identical, asymmetric equilibria, where integrated and nonintegrated firms coexist, may actually arise as an outcome of the integration game. Copyright 1996 The Massachusetts Institute of Technology.

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

Volume (Year): 5 (1996)
Issue (Month): 3 (09)
Pages: 409-432
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Handle: RePEc:bla:jemstr:v:5:y:1996:i:3:p:409-432

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  1. George Norman & Lynne Pepall, 2000. "Product Differentiation and Upstream-Downstream Relations," Discussion Papers Series, Department of Economics, Tufts University 0010, Department of Economics, Tufts University. [Downloadable!]
    Other versions:
  2. Jean J. GABSWEWICZ, Skerkilajda ZANAJ & Skerdilajda, ZANAJ, 2006. "Competitive in successive markets : entry and mergers," Discussion Papers (ECON - Département des Sciences Economiques) 2006055, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  3. Richard S. Higgins, 1999. "Competitive vertical foreclosure," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(4), pages 229-237.
  4. repec:mop:credwp:04.06.46 is not listed on IDEAS
  5. Gabszewicz Jean & Laussel Didier & Van Ypersele Tanguy & Zanaj Skerdilajda, 2008. "Market games and successive oligopolies," CREA Discussion Paper Series 08-05, Center for Research in Economic Analysis, University of Luxembourg. [Downloadable!]
    Other versions:
  6. Marie-Laure Allain & Saïd Souam, 2004. "Concentration horizontale et relations verticales," Working Papers hal-00242914_v1, HAL. [Downloadable!]
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  7. Noriaki Matsushima & Tomomichi Mizuno, 2009. "Vertical Separation as a Defense against Strong Suppliers," ISER Discussion Paper 0755, Institute of Social and Economic Research, Osaka University. [Downloadable!]
  8. Stefan Buehler & Armin Schmutzler, 2004. "Intimidating Competitors – Endogenous Vertical Integration and Downstream Investment in Successive Oligopoly," Working Papers 0409, University of Zurich, Socioeconomic Institute, revised Jul 2005. [Downloadable!]
    Other versions:
  9. Jean J., GABSZEWICZ & Skerdilajda, ZANAJ, 2007. "A note on successive oligopolies and vertical mergers," Discussion Papers (ECON - Département des Sciences Economiques) 2007036, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  10. repec:mop:credwp:05.04.56 is not listed on IDEAS
  11. Roberto Hernan & Praveen Kujal, 2006. "Vertical Integration, Market Foreclosure And Quality Investment," Economics Working Papers we061405, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  12. Tommaso Valletti, 2000. "Switching Costs in Vertically Related Markets," Review of Industrial Organization, Springer, vol. 17(4), pages 395-409, December. [Downloadable!] (restricted)
  13. Felipe Balmaceda & Eduardo Saavedra, 2004. "Vertical Integration and Shared Facilities in Unregulated Industries," Documentos de Trabajo 195, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  14. Gérard Gaudet & Ngo Van Long & Antoine Soubeyran, 1999. "Upstream-Downstream Specialization by Integrated Firms in a Partially Integrated Industry," Review of Industrial Organization, Springer, vol. 14(4), pages 321-335, June. [Downloadable!] (restricted)
    Other versions:
  15. Reisinger, Markus & Schnitzer, Monika, 2008. "A Model of Vertical Oligopolistic Competition," Discussion Papers in Economics 3189, University of Munich, Department of Economics. [Downloadable!]
    Other versions:
  16. Masahiro Abiru & Babu Nahata & Subhashis Raychaudhuri & Michael Waterson, 2003. "Equilibrium structures in vertical oligopoly," General Economics and Teaching 0306010, EconWPA. [Downloadable!]
    Other versions:
  17. Stefan Buehler & Armin Schmutzler, 2005. "Asymmetric Vertical Integration," Advances in Theoretical Economics, Berkeley Electronic Press, vol. 5(1), pages 1164-1164. [Downloadable!] (restricted)
    Other versions:
  18. George Norman & Lynne Pepall, 1998. "Product Competition and Upstream Flexible Specialization," Discussion Papers Series, Department of Economics, Tufts University 9818, Department of Economics, Tufts University. [Downloadable!]
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