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On The Competitive Effects Of Vertical Integration Under Product Differentiation

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  • Ramón Faulí-Oller

    ()
    (Universidad de Alicante)

  • Joel Sandonís Díez

    ()
    (Universidad de Alicante)

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    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. 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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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2003-31.pdf
    File Function: Fisrt version / Primera version, 2003
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    Bibliographic Info

    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2003-31.

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    Length: 19 pages
    Date of creation: Sep 2003
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    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasad:2003-31

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    Related research

    Keywords: Vertical integration; market foreclosure; two-part tariff contracts.;

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    References

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    1. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
    2. Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 25-51, 03.
    3. Riordan, Michael H, 1998. "Anticompetitive Vertical Integration by a Dominant Firm," American Economic Review, American Economic Association, vol. 88(5), pages 1232-48, December.
    4. Avenel, E. & Barlet, C., 2000. "Vertical Foreclosure, Technological Choice and Entry on the Intermediate Market," Papiers d'Economie Mathématique et Applications 2000.18, Université Panthéon-Sorbonne (Paris 1).
    5. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-85, Winter.
    6. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Choi, J.P. & Yi, S.S., 1997. "Vertical Foreclosure with the Choice of Input Specifications," Discussion Paper 1997-16, Tilburg University, Center for Economic Research.
    8. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    9. 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.
    10. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
    11. Fauli-Oller, Ramon & Sandonis, Joel, 2003. "To merge or to license: implications for competition policy," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 655-672, May.
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