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A Simple Model of Anticompetitive Vertical Integration

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Author Info
Joel Sandonís () (Departamento de Fundamentos del Análisis Económico II, Universidad del Pais Vasco, Spain)
Ramon Faulí-Oller () (Departamento de Fundamentos del Análisis Económico, Universidad de Alicante, Spain)
Abstract

The result of neutrality of vertical integration for competition postulated by the Chicago School can be supported by a benchmark model with (1) an upstream monopolist, (2) homogeneous goods downstream and (3) observable (two-part tariff) contracts. The result does not hold however, whenever any of the three assumptions is relaxed. In this paper we show first, that in presence of an alternative supply, vertical integration is profitable and leads to anticompetitive market foreclosure; second, under product differentiation, inefficient alternative supplies make vertical integration welfare improving, whereas it is profitable only for\ efficient enough second source supplies. As a consequence, a clear prescription for antitrust emerges: we should not allow for vertical integration.

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Paper provided by Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) in its series BILTOKI with number 200305.

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Date of creation: 23 Apr 2003
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Handle: RePEc:ehu:biltok:200305

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Postal: Dpto. de Econometría y Estadística, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Related research
Keywords: Vertical integration; two-part tariff contracts; market foreclosure.;

Find related papers by JEL classification:
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
D4 - Microeconomics - - Market Structure and Pricing

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