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On Vertical Mergers and Their Competitive Effects

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  • Yongmin Chen

    (University of Colorado at Boulder)

Abstract

It is well known that vertical integration can change an upstream producer's incentive to supply the integrated firm's downstream rivals. However, it has not been noticed that vertical integration also changes these rivals' incentive to choose suppliers. Once this is recognized, some important results in the literature are shown to be incorrect. An equilibrium theory of vertical merger is then developed. Under fairly general conditions, vertical mergers will result in both efficiency gains and market foreclosure (collusion), and a familiar measure concerning product differentiation can be used to evaluate whether a vertical merger tends to benefit or harm consumers.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0383.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0383

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  1. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  2. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-26, March.
  3. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  4. Reiffen, David, 1992. "Equilibrium Vertical Foreclosure: Comment," American Economic Review, American Economic Association, vol. 82(3), pages 694-97, June.
  5. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1992. "Equilibrium Vertical Foreclosure: Reply," American Economic Review, American Economic Association, vol. 82(3), pages 698-703, June.
  6. Riordan, M.H., 1996. "Anticompetitive Vertical Integration by a Dominant Firm," Papers 64, Boston University - Industry Studies Programme.
  7. 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.
  8. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
  9. Salop, Steven C & Scheffman, David T, 1987. "Cost-Raising Strategies," Journal of Industrial Economics, Wiley Blackwell, vol. 36(1), pages 19-34, September.
  10. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
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