When Backward Integration by a Dominant Firm Improves Welfare
AbstractThis paper studies the welfare consequences of a vertical merger that raises rivalsâ costs when downstream competition is Ã 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 âlow enoughâ. 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 consumersâ 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 InfoPaper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2000-42.
Date of creation: 2000
Date of revision:
Other versions of this item:
- Laurent Linnemer, 2002. "When Backward Integration by a Dominant Firm Improves Welfare," CESifo Working Paper Series 740, CESifo Group Munich.
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