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Collusion and downstream entry in a vertically integrated industry

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  • Éric Avenel

    (University of Rennes 1 - CREM-CNRS, France)

  • Stéphane Caprice

    (Toulouse School of Economics (GREMAQ, INRA))

Abstract

We analyse the impact of an entry threat at the downstream level on the ability of a pair of vertically integrated incumbents to collude. We present an original model of horizontal product differentiation on the final market and characterize the structures of this market for which an entry threat facilitates collusion between incumbents. While the entry threat leaves collusion and deviation profits unchanged, it lowers profits in punishment periods. Consequently, an entry threat discourages deviations and facilitates collusion, thus benefiting incumbents.

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Bibliographic Info

Paper provided by Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS in its series Economics Working Paper Archive (University of Rennes 1 & University of Caen) with number 201208.

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Date of creation: Jan 2012
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Handle: RePEc:tut:cremwp:201208

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Postal: CREM (UMR CNRS 6211) – Faculty of Economics, 7 place Hoche, 35065 RENNES Cedex
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Postal: CREM (UMR CNRS 6211) - Faculty of Economics, 7 place Hoche, 35065 Rennes Cedex - France
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Related research

Keywords: collusion; foreclosure; entry; vertical integration;

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References

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  1. 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.
  2. Eric Avenel & Corinne Barlet, 2000. "Vertical Foreclosure, Technological Choice, and Entry on the Intermediate Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 211-230, 06.
  3. Volker Nocke & Lucy White, 2007. "Do Vertical Mergers Facilitate Upstream Collusion?," American Economic Review, American Economic Association, vol. 97(4), pages 1321-1339, September.
  4. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-85, Winter.
  5. Avenel, Eric, 2003. "Strategic vertical integration without foreclosure," Royal Economic Society Annual Conference 2003 11, Royal Economic Society.
  6. 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.
  7. Normann, Hans-Theo, 2009. "Vertical integration, raising rivals' costs and upstream collusion," European Economic Review, Elsevier, vol. 53(4), pages 461-480, May.
  8. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, vol. 56(3), pages 571-99, May.
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