On The Competitive Effects Of Vertical Integration Under Product Differentiation
AbstractThe 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. Rey and Tirole (1999) show that, with secret contracts, vertical integration is profitable and anticompetitive. The present paper shows that, adding an alternative supplier and product differentiation to the benchmark model, the effects of vertical integration depend on the efficiency level of the alternative supplier. When the alternative supply is relatively efficient, we also obtain that vertical integration is profitable and anticompetitive. However, when the alternative supplier is relatively inefficient, vertical integration becomes unprofitable and increases social welfare.
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Bibliographic InfoPaper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2003-31.
Length: 19 pages
Date of creation: Sep 2003
Date of revision:
Publication status: Published by Ivie
Vertical integration; market foreclosure; two-part tariff contracts.;
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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