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Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices

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Author Info
Ali Hortaçsu
Chad Syverson

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Abstract

This paper empirically investigates the possible market power effects of vertical integration proposed in the theoretical literature on vertical foreclosure. It uses a rich data set of cement and ready-mixed concrete plants that spans several decades to perform a detailed case study. There is little evidence that foreclosure is quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. These patterns are consistent, however, with an alternative efficiency-based mechanism. Namely, higher-productivity producers are more likely to vertically integrate and are also larger, more likely to survive, and more likely to charge lower prices. We find evidence that integrated producers’ productivity advantage is tied to improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not due to firms’ vertical structures per se: nonvertical firms with large local concrete operations have similarly high productivity levels.

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File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?id=doi:10.1086/514347
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 115 (2007)
Issue (Month): ()
Pages: 250-301
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Handle: RePEc:ucp:jpolec:v:115:y:2007:p:250-301

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Justine S. Hastings, 2004. "Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California," American Economic Review, American Economic Association, vol. 94(1), pages 317-328, March. [Downloadable!] (restricted)
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  3. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "The Growth and Failure of U.S. Manufacturing Plants," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 671-98, November. [Downloadable!] (restricted)
    Other versions:
  4. Robert H. McGuckin & Sang V. Nguyen, 1995. "On Productivity and Plant Ownership Change: New Evidence from the Longitudinal Research Database," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 257-276, Summer. [Downloadable!] (restricted)
  5. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
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  6. G. Steven Olley & Ariel Pakes, 1992. "The Dynamics of Productivity in the Telecommunications Equipment Industry," NBER Working Papers 3977, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
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  12. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," Working Papers 05-11, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  13. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2004. "The Effect of Structural Reforms on Productivity and Profitability Enhancing Reallocation: Evidence from Colombia," NBER Working Papers 10367, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. 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. [Downloadable!] (restricted)
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  16. Chad Syverson, 2004. "Prices, Spatial Competition, and Heterogeneous Producers: An Empirical Test," Working Papers 04-16, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  17. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, vol. 61(2), pages 112-23, May. [Downloadable!] (restricted)
  18. Ali Hortacsu & Chad Syverson, 2006. "Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices," Working Papers 06-21, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  19. John Asker, 2004. "Diagnosing Foreclosure Due to Exclusive Dealing," Working Papers 04-36, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  20. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November. [Downloadable!] (restricted)
  21. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
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  22. Aw, Bee Yan & Chen, Xiaomin & Roberts, Mark J., 2001. "Firm-level evidence on productivity differentials and turnover in Taiwanese manufacturing," Journal of Development Economics, Elsevier, vol. 66(1), pages 51-86, October. [Downloadable!] (restricted)
  23. Johnson, Ronald N & Parkman, Allen M, 1987. "Spatial Competition and Vertical Integration; Cement and Concrete Revisited: Comment," American Economic Review, American Economic Association, vol. 77(4), pages 750-53, September. [Downloadable!] (restricted)
  24. Tasneem Chipty, 2001. "Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry," American Economic Review, American Economic Association, vol. 91(3), pages 428-453, June. [Downloadable!] (restricted)
  25. Rosengren, Eric S & Meehan, James W, Jr, 1994. "Empirical Evidence on Vertical Foreclosure," Economic Inquiry, Oxford University Press, vol. 32(2), pages 303-17, April.
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  26. Lucy White & Volker Nocke, 2004. "Do Vertical Mergers Facilitate Upstream Collusion?," 2004 Meeting Papers 45, Society for Economic Dynamics.
    Other versions:
  27. Allen, Bruce T, 1971. "Vertical Integration and Market Foreclosure: The Case of Cement and Concrete," Journal of Law & Economics, University of Chicago Press, vol. 14(1), pages 251-74, April.
  28. Riordan, Michael H, 1998. "Anticompetitive Vertical Integration by a Dominant Firm," American Economic Review, American Economic Association, vol. 88(5), pages 1232-48, December. [Downloadable!] (restricted)
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  29. REY, Patrick & TIROLE, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005. [Downloadable!]
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  30. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn. [Downloadable!] (restricted)
  31. Roberts, Mark J. & Supina, Dylan, 1996. "Output price, markups, and producer size," European Economic Review, Elsevier, vol. 40(3-5), pages 909-921, April. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Macchiavello, Rocco, 2007. "Financial Constraints and the Costs and Benefits of Vertical Integration," CEPR Discussion Papers 6104, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Ali Hortacsu & Chad Syverson, 2007. "Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices," NBER Working Papers 12894, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Allan Collard-Wexler, 2006. "Plant Turnover and Demand Fluctuations in the Ready-Mix Concrete Industry," Working Papers 06-08, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
  4. Macchiavello, Rocco, 2006. "Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence," CEPR Discussion Papers 5903, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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