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Intimidating competitors -- Endogenous vertical integration and downstream investment in successive oligopoly

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  • Buehler, Stefan
  • Schmutzler, Armin

Abstract

We examine the interplay of endogenous vertical integration and costreducing downstream investment in successive oligopoly. We start from a linear Cournot model to motivate our more general reducedform framework. For this general framework, we establish the following main results: First, vertical integration increases own investment and decreases competitor investment (intimidation effect). Second, asymmetric equilibria typically involve integrated firms that invest more into effciency than their separated counterparts. Our findings suggest that asymmetric vertical integration is a potential explanation for the initial difference between leader and laggard in investment games.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 26 (2008)
Issue (Month): 1 (January)
Pages: 247-265

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Handle: RePEc:eee:indorg:v:26:y:2008:i:1:p:247-265

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Web page: http://www.elsevier.com/locate/inca/505551

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  1. Gérard Gaudet & Ngo Van Long, 1995. "Vertical Integration, Foreclosure and Profits in the Presence of Double Marginalisation," CIRANO Working Papers 95s-40, CIRANO.
  2. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  3. Slade, Margaret E, 1998. "Beer and the Tie: Did Divestiture of Brewer-Owned Public Houses Lead to Higher Beer Prices?," Economic Journal, Royal Economic Society, vol. 108(448), pages 565-602, May.
  4. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Luis M.B. Cabral & Michael Riordan, 1992. "The Learning Curve, Market Dominance and Predatory Pricing," Papers 0039, Boston University - Industry Studies Programme.
  6. Waterman, David & Weiss, Andrew A., 1996. "The effects of vertical integration between cable television systems and pay cable networks," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 357-395.
  7. Jansen, Jos, 2003. "Coexistence of strategic vertical separation and integration," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 699-716, May.
  8. Slade, Margaret E, 1998. "Strategic Motives for Vertical Separation: Evidence from Retail Gasoline Markets," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(1), pages 84-113, April.
  9. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
  10. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
  11. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-85, Winter.
  12. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-42, March.
  13. Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
  14. Elberfeld, Walter, 2002. "Market Size and Vertical Integration: Stigler's Hypothesis Reconsidered," Journal of Industrial Economics, Wiley Blackwell, vol. 50(1), pages 23-42, March.
  15. Woodruff, Christopher, 2002. "Non-contractible investments and vertical integration in the Mexican footwear industry," International Journal of Industrial Organization, Elsevier, vol. 20(8), pages 1197-1224, October.
  16. Flaherty, M Therese, 1980. "Industry Structure and Cost-Reducing Investment," Econometrica, Econometric Society, vol. 48(5), pages 1187-1209, July.
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Citations

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Cited by:
  1. Fehmi Bouguezzi & Moez El Elj, 2010. "Vertical Integration and Patent Licensing in Upstream and Downstream Markets," Journal of Advanced Research in Management, ASERS Publishing, vol. 0(1), pages 4-17, June.
  2. Kesavayuth, Dusanee & Zikos, Vasileios, 2012. "Upstream and downstream horizontal R&D networks," Economic Modelling, Elsevier, vol. 29(3), pages 742-750.
  3. Noriaki Matsushima & Tomomichi Mizuno, 2009. "Input specificity and product differentiation," ISER Discussion Paper 0745, Institute of Social and Economic Research, Osaka University.
  4. Andreas Haller & Christian Jaag & Urs Trinkner, 2012. "Termination Charges in the International Parcel Market," Working Papers 0033, Swiss Economics.
  5. Buehler, Stefan & Burghardt, Dirk, 2013. "Globalization and Vertical Structure: An Empirical Investigation," Economics Working Paper Series 1310, University of St. Gallen, School of Economics and Political Science.
  6. Matsushima, Noriaki & Mizuno, Tomomichi, 2012. "Profit-enhancing competitive pressure in vertically related industries," Journal of the Japanese and International Economies, Elsevier, vol. 26(1), pages 142-152.
  7. Andreas Haller & Christian Jaag & Urs Trinkner, 2011. "Termination Charges in the International Parcel Market: Competition and Regulation," Working Papers 0028, Swiss Economics.
  8. Arijit Mukherjee & Piercarlo Zanchettin, 2012. "Vertical integration and product differentiation," Discussion Papers in Economics 12/17, Department of Economics, University of Leicester, revised Sep 2012.
  9. Chen, Yongmin & Sappington, David E.M., 2009. "Designing input prices to motivate process innovation," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 390-402, May.
  10. Ahmad Reza Saboori Memar, 2013. "Profitable Entry into an Unprofitable Market," MAGKS Papers on Economics 201306, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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