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Transaction Costs and Capacity Costs as Interrelated Determinants of Vertical Integration in Oligopolies

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  • Friedel Bolle
  • Yves Breitmoser

Abstract

This paper considers a two-stage oligopoly model with downstream retailers and two types of transaction costs (in contracting retailers and in direct retailing). Our analysis shows how transaction costs affect vertical integration in a strategic model of oligopoly, and it relates transaction costs to other characteristics of oligopolistic industries. In particular, we show that long- and short-term capacity costs interrelate in a rather complex manner with transaction costs in determining the degree of vertical integration. Our analysis thus challenges the focus of New Institutional Economics on transaction costs. In light of the results, we finally discuss welfare implications of regulatory interventions.

Suggested Citation

  • Friedel Bolle & Yves Breitmoser, 2011. "Transaction Costs and Capacity Costs as Interrelated Determinants of Vertical Integration in Oligopolies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(2), pages 266-290, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201106)167:2_266:tcacca_2.0.tx_2-9
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    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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