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Vertical integration, market foreclosure and quality investment

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  • Roberto Hernán González

    ()

  • Praveen Kujal

    ()

Abstract

Incentives to vertically integrate are studied in an industry where downstream firms are vertically differentiated. Vertical integration by one of the firms increases production costs for the rival. Increased production costs impact quality investment both by the integrated firm and the unintegrated rival. A firm, integrating first, always produces the high quality good and earns higher profits. Quality investment by both firms decreases under any (vertical integration) scenario and competition among downstream firms is softened. A fully integrated industry, with increased product differentiation, is observed in equilibrium. Due to increase in firm profits, social welfare under this structure is greater than under no integration.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Springer in its journal Portuguese Economic Journal.

Volume (Year): 11 (2012)
Issue (Month): 1 (April)
Pages: 1-20

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Handle: RePEc:spr:portec:v:11:y:2012:i:1:p:1-20

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Related research

Keywords: Vertical integration; Quality investment; Market power; Product differentiation; L15; L22; L42;

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References

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Cited by:
  1. E. Bacchiega & O. Bonroy, 2012. "Vertical relations and number of channels in quality-differentiated markets," Working Papers wp823, Dipartimento Scienze Economiche, Universita' di Bologna.

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