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Vertical integration, market foreclosure and quality investment

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  • Hernán, Roberto
  • Kujal, Praveen

Abstract

Incentives to vertically integrate are studied in an industry where downstream firms are vertically differentiated. Vertical integration by one of the firms increases production costs for the rival. Increased production costs impact quality investment both by the integrated firm and the unintegrated rival. A firm, integrating first, always produces the high quality good and earns higher profits. Quality investment by both firms decreases under any (vertical integration) scenario and competition among downstream firms is softened. A fully integrated industry, with increased product differentiation, is observed in equilibrium. Due to increase in firm profits, social welfare under this structure is greater than under no integration.

Suggested Citation

  • Hernán, Roberto & Kujal, Praveen, 2006. "Vertical integration, market foreclosure and quality investment," UC3M Working papers. Economics we061405, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we061405
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    References listed on IDEAS

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    Cited by:

    1. E. Bacchiega & O. Bonroy, 2012. "Vertical relations and number of channels in quality-differentiated markets," Working Papers wp823, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Emanuele Bacchiega & Olivier Bonroy, 2015. "On the benefits of contractual inefficiency in quality-differentiated markets," Oxford Economic Papers, Oxford University Press, vol. 67(3), pages 846-863.
    3. Huashu Wang & Zhenyi Li & H. Holly Wang, 2022. "Does Backward Integration Improve Food Safety of the Tea Industry in China in the Post-COVID-19 Era?," Sustainability, MDPI, vol. 14(4), pages 1-15, February.

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    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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