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Upstream Competition between Vertically Integrated Firms

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  • Marc Bourreau
  • Johan Hombert
  • Jerome Pouyet
  • Nicolas Schutz

Abstract

We propose a model of two-tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous input, the Bertrand result may not obtain, and the input may be priced above marginal cost in equilibrium, which is detrimental to consumers' surplus and social welfare. We obtain that these partial foreclosure equilibria are more likely to exist when downstream competition is fierce. We then use our model to assess the impact of several regulatory tools in the telecommunications industry.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal The Journal of Industrial Economics.

Volume (Year): 59 (2011)
Issue (Month): 4 (December)
Pages: 677-713

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Handle: RePEc:bla:jindec:v:59:y:2011:i:4:p:677-713

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References

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  1. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
  2. Yongmin Chen & Michael H. Riordan, 2007. "Vertical integration, exclusive dealing, and expost cartelization," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 1-21, 03.
  3. repec:hal:wpaper:hal-00440126 is not listed on IDEAS
  4. Duarte Brito & Pedro Pereira, 2010. "Access to Bottleneck Inputs under Oligopoly: A Prisoners’ Dilemma?," Southern Economic Journal, Southern Economic Association, vol. 76(3), pages 660-677, January.
  5. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509, December.
  6. Volker Nocke & Lucy White, 2003. "Do Vertical Mergers Facilitate Upstream Collusion?," PIER Working Paper Archive 03-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  7. Höffler, Felix & Schmidt, Klaus M., 2007. "Two Tales on Resale," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 198, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  8. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  9. Marc Bourreau & Johan Hombert & Jerome Pouyet & Nicolas Schutz, 2011. "Upstream Competition between Vertically Integrated Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 677-713, December.
  10. David E. M Sappington, 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1631-1638, December.
  11. Fauli-Oller, Ramon & Sandonis, Joel, 2002. "Welfare reducing licensing," Games and Economic Behavior, Elsevier, vol. 41(2), pages 192-205, November.
  12. de Bijl,Paul & Peitz,Martin, 2003. "Regulation and Entry into Telecommunications Markets," Cambridge Books, Cambridge University Press, number 9780521808378.
  13. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  14. Höffler, Felix & Schmidt, Klaus M., 2008. "Two tales on resale," Munich Reprints in Economics 19443, University of Munich, Department of Economics.
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Citations

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Cited by:
  1. Marc Bourreau & Cambini Steffen, 2013. "Geographic Access Rules and Investments," RSCAS Working Papers 2013/28, European University Institute.
  2. Bourreau, Marc & Dogan, Pinar, 2010. "Level of Access and Competition in Broadband Markets," Scholarly Articles 4454152, Harvard Kennedy School of Government.
  3. Romain Lestage & David Flacher, 2011. "Access Regulation and Welfare," TEMEP Discussion Papers 201185, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Dec 2011.
  4. Hunold, Matthias & Röller, Lars-Hendrik & Stahl, Konrad O, 2012. "Backwards Integration and Strategic Delegation," CEPR Discussion Papers 8910, C.E.P.R. Discussion Papers.
  5. Johan Hombert & Jérôme Pouyet & Nicolas Schutz, 2009. "Anticompetitive vertical mergers waves," PSE Working Papers hal-00440143, HAL.
  6. Ingo Vogelsang, 2013. "The Endgame of Telecommunications Policy? A Survey," Review of Economics, Lucius & Lucius, vol. 64(3), pages 193-269.
  7. Marc Bourreau & Johan Hombert & Jérôme Pouyet & Nicolas Schutz, 2009. "Upstream Competition between Vertically Integrated Firms," PSE Working Papers hal-00440126, HAL.
  8. Dogan, Pinar & Bourreau, Marc & Manant, Matthieu, 2010. "A Critical Review of the “Ladder of Investment†Approach," Scholarly Articles 4777447, Harvard Kennedy School of Government.

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