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Digging Deep to Compete: Vertical Integration, Product Market Competition and Prices

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  • Danny McGowan

Abstract

This article establishes a causal effect of product market competition on vertical integration. I exploit a hitherto unexplored natural experiment in the U.S. coal mining industry and a unique mine†level organizational data set. Following an exogenous increase in product market competition, the incidence of vertical integration fell by 33% within the treatment group relative to the counterfactual. I find novel evidence that transition to the lower degree of vertical integration is driven by competition's reducing market prices by 32% which decreased the incentive to conduct vertical mergers. I discuss several possible interpretations of these changes.

Suggested Citation

  • Danny McGowan, 2017. "Digging Deep to Compete: Vertical Integration, Product Market Competition and Prices," Journal of Industrial Economics, Wiley Blackwell, vol. 65(4), pages 683-718, December.
    • Handle: RePEc:bla:jindec:v:65:y:2017:i:4:p:683-718
    DOI: 10.1111/joie.12157
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    Cited by:

    1. Margaret E. Slade, 2021. "Vertical Mergers: A Survey of Ex Post Evidence and Ex Ante Evaluation Methods," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(4), pages 493-511, June.
    2. Laura Alfaro & Nicholas Bloom & Paola Conconi & Harald Fadinger & Patrick Legros & Andrew F. Newman & Raffaella Sadun & John Van Reenen, 2017. "Come Together: Firm Boundaries and Delegation," Harvard Business School Working Papers 18-051, Harvard Business School, revised May 2019.
    3. Slade, Margaret E., 2019. "Vertical Mergers: Ex Post Evidence and Ex Ante Evaluation Methods," Microeconomics.ca working papers margaret_e._slade-2019-10, Vancouver School of Economics, revised 25 Jun 2019.
    4. Stiebale, Joel & Vencappa, Dev, 2022. "Import competition and vertical integration: Evidence from India," Journal of Development Economics, Elsevier, vol. 155(C).
    5. Kacker, Kanishka & Lange, Ian, 2022. "Inter-regional coal mine competition in the US: Evidence from rail restrictions," Energy Economics, Elsevier, vol. 110(C).
    6. Hansen, Benjamin & Miller, Keaton & Weber, Caroline, 2022. "Vertical integration and production inefficiency in the presence of a gross receipts tax," Journal of Public Economics, Elsevier, vol. 212(C).
    7. Kaniṣka Dam & Konstantinos Serfes, 2021. "A Price Theory of Vertical and Lateral Integration Under Productivity Heterogeneity," Journal of Industrial Economics, Wiley Blackwell, vol. 69(4), pages 751-784, December.

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