Vertical Integration in the presence of a Cost-Reducing Technology

This paper examines vertical integration incentives in the presence of a cost-reducing technology. Combining the technology adoption and vertical merger literatures in a simple duopoly model, I show that asymmetric integration can occur even in a purely symmetric set-up, without synergies or foreclosure incentives. This paper makes three further contributions. First, in this model, integration is profitable whenever it allows the firm to adopt the technology faster and to become a profitable technology leader for a longer period of time. Second, comparing preemption and precommitment game, I show that the asymmetric equilibrium may exist under both types of game. Third, vertical integration generally reduces consumers' surplus, but often competition authorities should not forbid such vertical mergers if they seek to maximize social welfare.