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Vertical integration, foreclosure, and productive efficiency

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  • Markus Reisinger
  • Emanuele Tarantino

Abstract

type="main"> We analyze the consequences of vertical integration by a monopoly producer dealing with two retailers (downstream firms) of varying efficiency via secret two-part tariffs. When integrated with the inefficient retailer, the monopoly producer does not foreclose the rival retailer due to an output-shifting effect. This effect can induce the integrated firm to engage in below-cost pricing at the wholesale level, thereby rendering integration procompetitive. Output shifting arises with homogeneous and differentiated products. Moreover, we show that integration with an inefficient retailer emerges in a model with uncertainty over retailers' costs, and this merger can be procompetitive in expectation.

Suggested Citation

  • Markus Reisinger & Emanuele Tarantino, 2015. "Vertical integration, foreclosure, and productive efficiency," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 461-479, September.
    • Handle: RePEc:bla:randje:v:46:y:2015:i:3:p:461-479
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    File URL: http://hdl.handle.net/10.1111/1756-2171.12093
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