Vertical mergers, foreclosure and raising rivals' costs: Experimental evidence
AbstractThe hypothesis that vertically integrated firms have an incentive to foreclose the input market because foreclosure raises its downstream rivals' costs is the subject of much controversy in the theoretical industrial organization literature. A powerful argument against this hypothesis is that, absent commitment, such foreclosure cannot occur in Nash equilibrium. The laboratory data reported in this paper provide experimental evidence in favor of the hypothesis. Markets with a vertically integrated firm are signifiantly less competitive than those where firms are separate. While the experimental results violate the standard equilibrium notion, they are consistent with the quantalresponse generalization of Nash equilibrium. --
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Bibliographic InfoPaper provided by Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) in its series DICE Discussion Papers with number 05.
Date of creation: 2010
Date of revision:
experimental economics; foreclosure; quantal response equilibrium; raising rival's costs; vertical integration;
Other versions of this item:
- Hans Theo Normann, 2011. "Vertical Mergers, Foreclosure And Raising Rivals' Costs â€“ Experimental Evidence," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 59(3), pages 506-527, 09.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-13 (All new papers)
- NEP-COM-2010-11-13 (Industrial Competition)
- NEP-EXP-2010-11-13 (Experimental Economics)
- NEP-GTH-2010-11-13 (Game Theory)
- NEP-IND-2010-11-13 (Industrial Organization)
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