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Vertical Integration and Market Foreclosure with Convex Downstream Costs

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  • Pio Baake
  • Ulrich Kamecke
  • Hans-Theo Normann

Abstract

In a framework with an upstream monopoly and a downstream duopoly, we analyze the impact of convex costs on the downstream level. In constrast to the case of constant marginal costs, vertical integration does not imply complete market foreclosure. While the nonintegrated downstream ¯rm receives a strictly positive amount of the intermediate good, the downstream allocation is ine±cient. However, a parametrized example indicates that competition at the downstream level may increase aggregate welfare.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.38499.de/dp260.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 260.

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Length: 11 p.
Date of creation: 2001
Date of revision:
Handle: RePEc:diw:diwwpp:dp260

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Keywords: Vertical restraints; commitment;

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References

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  1. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn.
  2. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  3. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-42, March.
  4. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
  5. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Reiffen, David, 1992. "Equilibrium Vertical Foreclosure: Comment," American Economic Review, American Economic Association, vol. 82(3), pages 694-97, June.
  7. Martin, Stephen & Normann, Hans-Theo & Snyder, Christopher M, 2001. "Vertical Foreclosure in Experimental Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 466-96, Autumn.
  8. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
  9. Alexander, Cindy R & Reiffen, David, 1995. "Vertical Contracts as Strategic Commitments: How Are They Enforced?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 623-49, Winter.
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Cited by:
  1. Salim, Claudia, 2009. "Optional linear input prices in vertical relations," Discussion Papers 2009/4, Free University Berlin, School of Business & Economics.
  2. Salim, Claudia, 2009. "Optional linear input prices in vertical relations," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 258, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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