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Downstream Investment in Oligopoly

Author

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  • Stefan Buehler

    (Socioeconomic Institute, University of Zurich)

  • Armin Schmutzler

    (Socioeconomic Institute, University of Zurich)

Abstract

We examine cost-reducing investment in vertically-related oligopolies, where firms may be vertically integrated or separated. Analyzing a standard linear Cournot model, we show that: (i) Integrated firms invest more than separated competitors. (ii) Vertical integration increases own investment and decreases competitor investment. (iii) Firms may integrate strategically so as to preempt investments by competitors. Adopting a reduced-form approach, we identify demand/mark-up complementarities in the product market as the driving force for these results. We show that our results generalize naturally beyond the Cournot example, and we discuss policy implications.

Suggested Citation

  • Stefan Buehler & Armin Schmutzler, 2003. "Downstream Investment in Oligopoly," SOI - Working Papers 0310, Socioeconomic Institute - University of Zurich.
    • Handle: RePEc:soz:wpaper:0310
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    References listed on IDEAS

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    Cited by:

    1. Buehler, Stefan & Schmutzler, Armin, 2008. "Intimidating competitors -- Endogenous vertical integration and downstream investment in successive oligopoly," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 247-265, January.
    2. Simon Loertscher & Yves Schneider, 2005. "Switching Costs, Firm Size, and Market Structure," SOI - Working Papers 0508, Socioeconomic Institute - University of Zurich.
    3. Schmutzler, Armin & Bühler, Stefan, 2003. "Who Integrates?," CEPR Discussion Papers 4066, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    vertically-related oligopolies; investments; vertical integration; cost reduction;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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