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Vertical Integration and Downstream Collusion

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  • Sara Biancini
  • David Ettinger

Abstract

We investigate the effect of a vertical merger on downstream firms’ ability to collude in a repeated game framework. We show that a vertical merger has two main effects. On the one hand, it increases the total collusive profits, increasing the stakes of collusion. On the other hand, it creates an asymmetry between the integrated firm and the unintegrated competitors. The integrated firm, accessing the input at marginal cost, faces higher profits in the deviation phase and in the non cooperative equilibrium, which potentially harms collusion. As we show, the optimal collusive profit-sharing agreement takes care of the increased incentive to deviate of the integrated firm, while optimal punishment erases the difficulty related to the asymmetries in the non cooperative state. As a result, vertical integration generally favors collusion.

Suggested Citation

  • Sara Biancini & David Ettinger, 2016. "Vertical Integration and Downstream Collusion," CESifo Working Paper Series 5933, CESifo.
    • Handle: RePEc:ces:ceswps:_5933
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    References listed on IDEAS

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    Cited by:

    1. Frédéric Marty & Thierry Warin, 2021. "Visa's Abandoned Plan to Acquire Plaid: What Could Have Been a Textbook Case of a Killer Acquisition," SciencePo Working papers Main halshs-03405108, HAL.
    2. Schlütter, Frank, 2022. "Managing Seller Conduct in Online Marketplaces and Platform Most-Favored Nation Clauses," LIDAM Discussion Papers CORE 2022026, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Serge Moresi & Steven C. Salop, 2021. "When Vertical is Horizontal: How Vertical Mergers Lead to Increases in “Effective Concentration”," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 59(2), pages 177-204, September.
    4. Frédéric Marty & Thierry Warin, 2020. "Visa Acquiring Plaid: A Tartan over a Killer Acquisition? Reflections on the risks of harming competition through the acquisition of startups within digital ecosystems," Working Papers hal-03029746, HAL.
    5. Charistos, Konstantinos & Pinopoulos, Ioannis N. & Skartados, Panagiotis, 2022. "Passive forward ownership and upstream collusion," Economics Letters, Elsevier, vol. 216(C).
    6. Shekhar, Shiva & Thomes, Tim Paul, 2020. "Passive backward acquisitions and downstream collusion," Economics Letters, Elsevier, vol. 197(C).
    7. Li, Pei & Tan, Dan & Wang, Guangyong & Wei, Hang & Wu, Jilan, 2021. "Retailer's vertical integration strategies under different business modes," European Journal of Operational Research, Elsevier, vol. 294(3), pages 965-975.
    8. Jen-Yao Lee & Chen-Chia Fan & Chien-Shu Tsai, 2023. "Network Externalities and Downstream Collusion under Asymmetric Costs: A Note," Games, MDPI, vol. 14(2), pages 1-11, March.
    9. Stanislav Stoykov & Ivan Kostov, 2023. "Price Competition with Differentiated Products on a Two-Dimensional Plane: The Impact of Partial Cartel on Firms’ Profits and Behavior," Games, MDPI, vol. 14(2), pages 1-25, March.
    10. Bet, Germán & Cui, Shana & Sappington, David E.M., 2021. "The impact of vertical integration on losses from collusion," International Journal of Industrial Organization, Elsevier, vol. 77(C).

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    More about this item

    Keywords

    vertical integration; tacit collusion;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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