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On The Competitive Effects Of Vertical Integration Under Product Differentiation

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Author Info
Ramón Faulí-Oller () (Universidad de Alicante)
Joel Sandonís () (Universidad de Alicante)
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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Publisher 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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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

References listed on IDEAS
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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. 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. [Downloadable!] (restricted)
  3. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
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  4. Avenel, E. & Barlet, C., 2000. "Vertical Foreclosure, Technological Choice and Entry on the Intermediate Market," Papers 2000.18, Paris I - Economie Mathematique et Applications.
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  5. Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 9(1), pages 25-51, 03. [Downloadable!] (restricted)
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  6. Jay Pil Choi & Sang-Seung Yi, 2000. "Vertical Foreclosure with the Choice of Input Specifications," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 717-743, Winter.
  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. 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)
  9. Riordan, Michael H, 1998. "Anticompetitive Vertical Integration by a Dominant Firm," American Economic Review, American Economic Association, vol. 88(5), pages 1232-48, December. [Downloadable!] (restricted)
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  10. REY, Patrick & TIROLE, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005. [Downloadable!]
    Other versions:
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