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Vertical Integration as a Source of Hold-up

Author

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  • Marie-Laure Allain

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique)

  • Claire Chambolle

    (ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique)

  • Patrick Rey

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

While vertical integration is traditionally seen as a solution to the holdup problem, this article highlights instead that it can generate holdup problems-for rivals. We consider a successive duopoly where downstream firms invest and then secure support from an upstream supplier. We first show that vertical integration generates ex ante incentives to create holdup problems: an integrated supplier is willing to pre-commit itself to appropriating or dissipating part of its customer's profits, to expose the independent rival to being held-up by the other supplier, and discourage in this way the rival's investment. We then show that, even in the absence of any pre-commitment, vertical integration also creates holdup problems ex post when degrading the quality of the support provided to one downstream firm benefits its rival. We also provide illustrations in terms of standard industrial organization models and of antitrust cases, and discuss the robustness of the insights.

Suggested Citation

  • Marie-Laure Allain & Claire Chambolle & Patrick Rey, 2016. "Vertical Integration as a Source of Hold-up," Post-Print hal-03523213, HAL.
  • Handle: RePEc:hal:journl:hal-03523213
    DOI: 10.1093/restud/rdv035
    Note: View the original document on HAL open archive server: https://hal.science/hal-03523213
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    More about this item

    Keywords

    Incomplete contracts; Hold-up; Vertical Integration; Vertical foreclosure;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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