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When Backward Integration by a Dominant Firm Improves Welfare

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  • Laurent Linnemer

Abstract

This paper studies the welfare consequences of a vertical merger that raises rivals‘ costs when downstream competition is à la Cournot between firms with constant asymmetric marginal costs. The main result is that such a vertical merger can nevertheless improve welfare if it involves a downstream firm whose cost is “low enough“. This is because by raising the input price paid by the non-merging firms the merger thereby shifts production away from those relatively inefficient producers in favor of the more efficient firm. However there is a tradeoff between the gain in productive efficiency and the loss in consumers‘ surplus caused by a higher downstream price which follows a higher input price. It is also shown, through an example, that this result extends to price competition with differentiated products.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 740.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_740

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Related research

Keywords: foreclosure; raising rival costs; Cournot; welfare; asymmetric costs;

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  1. Joseph Farrell & Carl Shapiro, 1990. "Asset Ownership and Market Structure in Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 275-292, Summer.
  2. Alexander Schrader & Stephen Martin, 1998. "Vertical Market Participation," Review of Industrial Organization, Springer, Springer, vol. 13(3), pages 321-331, June.
  3. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(2), pages 345-56, May.
  4. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1992. "Equilibrium Vertical Foreclosure: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 698-703, June.
  5. Riordan, M.H., 1996. "Anticompetitive Vertical Integration by a Dominant Firm," Papers, Boston University - Industry Studies Programme 64, Boston University - Industry Studies Programme.
  6. Géarard Gaudet & Ngo Long, 1996. "Vertical Integration, Foreclosure, and profits in the Presence of Double Marginalization," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 5(3), pages 409-432, 09.
  7. Novshek, William, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(1), pages 85-98, January.
  8. Eric Avenel & Corinne Barlet, 2000. "Vertical Foreclosure, Technological Choice, and Entry on the Intermediate Market," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 9(2), pages 211-230, 06.
  9. Peterman, John L, 1975. "The Brown Shoe Case," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 18(1), pages 81-146, April.
  10. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, American Economic Association, vol. 80(1), pages 127-42, March.
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Cited by:
  1. Lukach, R. & Plasmans, J.E.J., 2002. "Measuring Knowledge Spillovers using Patent Citations: Evidence from the Belgian Firm's Data," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-92281, Tilburg University.

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