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A Fixed Effect Model of Endogenous Integration Decision and Its Competitive Effects

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Author Info
Kerem Cakirer (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
Abstract

This paper studies endogenous integration decisions of firms and its competitive effects in a complementary market setting where downstream firms sell a product which must have a compatible variety of products that are supplied by upstream firms. I present the conditions under which a downstream firm will prefer integrating with an upstream firm, and conditions under a counter merger of firms occur. The analysis shows that a vertical merger is more likely to occur whenever one of the upstream firm is significantly productive than the other. Competitive effect of a integration of two firms can lead to a counter integration of rivals post integration. Counter integration is likely whenever both upstream firms are highly productive. In addition to a vertical merger and two vertical mergers, contracting under independent ownership can also be the method of procuring. As a result, no integration activity can be observed. The results are obtained in a general two downstream firms and two upstream firms market setting that allows efficient compatibility contracts between upstream and downstream producers.

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Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2007-18.

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Date of creation: Nov 2007
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Handle: RePEc:iuk:wpaper:2007-18

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Related research
Keywords: Endogenous Vertical Integration Positive Externality Complementary Products Product Variety

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L4 - Industrial Organization - - Antitrust Issues and Policies

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  1. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-85, Winter.
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  2. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Blackwell Publishing, vol. 40(1), pages 85-103, March. [Downloadable!] (restricted)
  3. Bolton, Patrick & Whinston, Michael D, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 121-48, January. [Downloadable!] (restricted)
  4. Farrell, Joseph & Shapiro, Carl, 1989. "Optimal Contracts with Lock-In," American Economic Review, American Economic Association, vol. 79(1), pages 51-68, March. [Downloadable!] (restricted)
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  5. R. Preston McAfee, 1999. "The effects of vertical integration on competing input suppliers," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-8. [Downloadable!]
  6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
  8. Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring. [Downloadable!] (restricted)
  9. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Blackwell Publishing, vol. 40(1), pages 105-23, March. [Downloadable!] (restricted)
  10. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-81, December. [Downloadable!] (restricted)
  11. Neil Gandal & Michael Kende & Rafael Rob, 2000. "The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 43-61, Spring.
  12. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-26, March. [Downloadable!] (restricted)
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  13. Besen, Stanley M & Farrell, Joseph, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 117-31, Spring. [Downloadable!] (restricted)
  14. Beggs, Alan W, 1994. "Mergers and Malls," Journal of Industrial Economics, Blackwell Publishing, vol. 42(4), pages 419-28, December. [Downloadable!] (restricted)
  15. Carmen Matutes & Pierre Regibeau, 1988. ""Mix and Match": Product Compatibility without Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 221-234, Summer. [Downloadable!] (restricted)
  16. D. Lee Heavner, 2004. "Vertical Enclosure: Vertical Integration and the Reluctance to Purchase from a Competitor," Journal of Industrial Economics, Blackwell Publishing, vol. 52(2), pages 179-199, 06. [Downloadable!] (restricted)
  17. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Blackwell Publishing, vol. 36(3), pages 257-65, March. [Downloadable!] (restricted)
  18. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May. [Downloadable!] (restricted)
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