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

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  • Ali Hortacsu
  • Chad Syverson

Abstract

This paper looks at the reasons for and results of vertical integration, with specific regard to its possible effects on market power as proposed in the theoretical literature on foreclosure. It uses a rich data set on producers in the cement and ready-mixed concrete industries over a 34- year period to perform a detailed case study. There is little evidence that foreclosure effects are quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. We suggest an alternative mechanism that is consistent with these patterns and provide additional evidence in support of it: namely, that higher productivity producers are more likely to vertically integrate, and as has been documented elsewhere, are also larger, more likely to grow and survive, and charge lower prices. We explore possible sources of vertically integrated producers’ productivity advantage and find that the advantage is tied to firm size, possibly in part through improved logistics coordination, but not to several other possible explanations.

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File URL: ftp://ftp2.census.gov/ces/wp/2006/CES-WP-06-21.pdf
File Function: First version, 2006
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 06-21.

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Length: 53 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:cen:wpaper:06-21

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References

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  1. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  2. 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.
  3. Volker Nocke & Lucy White, 2003. "Do Vertical Mergers Facilitate Upstream Collusion?," PIER Working Paper Archive 03-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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