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Do Vertical Mergers Facilitate Upstream Collusion?

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Author Info
Lucy White
Volker Nocke

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Abstract

In this paper we investigate the impact of vertical mergers on upstream firms' ability to sustain collusion. We show in a number of models that the net effect of vertical integration is to facilitate collusion. Several effects arise. When upstream offers are secret, vertical mergers facilitate collusion through the operation of an outlets effect: Cheating unintegrated firms can no longer profitably sell to the downstream affiliates of their integrated rivals. Vertical integration also facilitates collusion through a reaction effect: the vertically integrated firm's `contract' with its downstream affiliate can be more flexible and thus allows a swifter reaction in punishing defectors. Offsetting these two effects is a possible punishment effect which arises if the integrated structure is able to make more profits in the punishment phase than a disintegrated structure

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Publisher Info
Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 45.

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Date of creation: 2004
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Handle: RePEc:red:sed004:45

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Related research
Keywords: vertical mergers; collusion; vertical integration;

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Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn. [Downloadable!] (restricted)
  2. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Ilya Segal, 1999. "Contracting With Externalities," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 337-388, May. [Downloadable!] (restricted)
  4. Yongmin Chen, 2005. "Vertical Disintegration," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 14(1), pages 209-229, 03. [Downloadable!] (restricted)
  5. Levenstein, Margaret C, 1997. "Price Wars and the Stability of Collusion: A Study of the Pre-World War I Bromine Industry," Journal of Industrial Economics, Blackwell Publishing, vol. 45(2), pages 117-37, June. [Downloadable!] (restricted)
  6. Jacques Cremer & Michael H. Riordan, 1987. "On Governing Multilateral Transactions with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 436-451, Autumn. [Downloadable!] (restricted)
  7. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Blackwell Publishing, vol. 36(3), pages 257-65, March. [Downloadable!] (restricted)
  8. 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:
  9. Yongmin Chen & Michael H. Riordan, 2003. "Vertical Integration, Exclusive Dealing, and Ex Post Cartelization," Discussion Papers 0203-13, Columbia University, Department of Economics. [Downloadable!]
  10. Ilya R. Segal & Michael D. Whinston, 2000. "Naked Exclusion: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 296-309, March. [Downloadable!] (restricted)
  11. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May. [Downloadable!] (restricted)
  12. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-45, December. [Downloadable!] (restricted)
  13. 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.
  14. Yongmin Chen, 2000. "On Vertical Mergers and Their Competitive Effects," Econometric Society World Congress 2000 Contributed Papers 0383, Econometric Society. [Downloadable!]
    Other versions:
  15. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Blackwell Publishing, vol. 38(113), pages 1-12, January. [Downloadable!] (restricted)
  16. Jullien, Bruno & Rey, Patrick, 2000. "Resale Price Maintenance and Collusion," CEPR Discussion Papers 2553, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  17. Patrick Rey & Thibaud Vergé, 2004. "Bilateral Control with Vertical Contracts," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 728-746, Winter.
    Other versions:
  18. B. Douglas Bernheim & Michael D. Whinston, 1998. "Exclusive Dealing," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 64-103, February. [Downloadable!] (restricted)
    Other versions:
  19. Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January. [Downloadable!] (restricted)
  20. Ken Hendricks & Rob Porter & Guofu Tan, 2000. "Joint Bidding in Federal Offshore Oil and Gas Lease Auctions," Econometric Society World Congress 2000 Contributed Papers 1763, Econometric Society. [Downloadable!]
  21. Robert H. Porter, 1983. "A Study of Cartel Stability: The Joint Executive Committee, 1880-1886," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 301-314, Autumn. [Downloadable!] (restricted)
  22. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carlos Scartascini & Mariano Tommasi & Ernesto H. Stein, 2008. "Veto Players, Intertemporal Interactions and Policy Adaptability: How Do Political Institutions Work?," RES Working Papers 4593, Inter-American Development Bank, Research Department. [Downloadable!]
  2. Ali Hortacsu & Chad Syverson, 2007. "Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices," NBER Working Papers 12894, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Simon Loertscher & Markus Reisinger, 2009. "Competitive Effects of Vertical Integration with Downstream Oligopsony and Oligopoly," Discussion Papers 278, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  4. Filippo Vergara Caffarelli, 2006. "Merge and Compete. Strategic incentives for vertical integration," Temi di discussione (Economic working papers) 608, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  5. Hans-Theo Normann, 2008. "Vertical Integration, Raising Rivals’ Costs and Upstream Collusion," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2008_30, Max Planck Institute for Research on Collective Goods. [Downloadable!]
  6. Jay Pil Choi & Heiko Gerlach, 2009. "Multi-Market Collusion with Demand Linkages and Antitrust Enforcement," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. George Symeonidis, 2009. "Downstream merger and welfare in a bilateral oligopoly," Economics Discussion Papers 671, University of Essex, Department of Economics. [Downloadable!]
  8. George J. Mailath & Volker Nocke & Lucy White, 2004. "When the Punishment Must Fit the Crime: Remarks on the Failure of Simple Penal Codes in Extensive-Form Games," PIER Working Paper Archive 04-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
  9. Pedro Mendi, 2009. "Backward integration and collusion in a duopoly model with asymmetric costs," Journal of Economics, Springer, vol. 96(2), pages 95-112, March. [Downloadable!] (restricted)
  10. Carlos Scartascini & Mariano Tommasi & Ernesto H. Stein, 2008. "Un Enfoque Intertemporal Interactions and Policy Adaptability: How Do Political Institutions Work?," RES Working Papers 4594, Inter-American Development Bank, Research Department. [Downloadable!]
  11. Scholz, Julia, 2008. "Auswirkungen vertikaler Kollusionsprobleme auf die vertragliche Ausgestaltung von Kreditverkäufen," Discussion Papers in Business Administration 4581, University of Munich, Munich School of Management. [Downloadable!]
  12. Pedro Mendi, 2005. "Vertical Integration, Collusion Downstream, and Partial Market Foreclosure," Faculty Working Papers 17/05, School of Economics and Business Administration, University of Navarra. [Downloadable!]
  13. Volker Nocke & Lucy White, 2003. "Do Vertical Mergers Facilitate Upstream Collusion? Second Version," PIER Working Paper Archive 05-013, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 08 Mar 2005. [Downloadable!]
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