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Upstream Competition between Vertically Integrated Firms

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  • Marc Bourreau
  • Johan Hombert
  • Jerome Pouyet
  • Nicolas Schutz

Abstract

We propose a model of two-tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous input, the Bertrand logic may collapse, and the input may be priced above marginal cost in equilibrium. These partial foreclosure equilibria are more likely to exist when downstream competition is fierce or when unintegrated downstream competitors are relatively inefficient. We discuss the impact of several regulatory tools on the competitiveness of the wholesale market.
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Suggested Citation

  • Marc Bourreau & Johan Hombert & Jerome Pouyet & Nicolas Schutz, 2011. "Upstream Competition between Vertically Integrated Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 677-713, December.
  • Handle: RePEc:bla:jindec:v:59:y:2011:i:4:p:677-713
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    1. Marc Bourreau & Johan Hombert & Jerome Pouyet & Nicolas Schutz, 2011. "Upstream Competition between Vertically Integrated Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 677-713, December.
    2. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509, January.
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    6. Volker Nocke & Lucy White, 2007. "Do Vertical Mergers Facilitate Upstream Collusion?," American Economic Review, American Economic Association, pages 1321-1339.
    7. Sandonis, Joel & Fauli-Oller, Ramon, 2006. "On the competitive effects of vertical integration by a research laboratory," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 715-731, July.
    8. Duarte Brito & Pedro Pereira, 2010. "Access to Bottleneck Inputs under Oligopoly: A Prisoners’ Dilemma?," Southern Economic Journal, Southern Economic Association, vol. 76(3), pages 660-677, January.
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    10. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, January.
    11. David E. M Sappington, 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1631-1638, December.
    12. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 345-356.
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    Cited by:

    1. Ioannis N. Pinopoulos, 2017. "Upstream horizontal mergers and vertical integration," Discussion Paper Series 2017_07, Department of Economics, University of Macedonia, revised Aug 2017.
    2. Avenel, Eric & Caprice, Stéphane, 2015. "Collusion et possibilité d’entrée en aval dans une industrie verticalement intégrée," TSE Working Papers 15-613, Toulouse School of Economics (TSE).
    3. Paul Madden & Mario Pezzino, 2013. "Sports League Quality, Broadcaster TV Rights Bids and Wholesale Regulation of Sports Channels," The School of Economics Discussion Paper Series 1304, Economics, The University of Manchester.
    4. Jullien, Bruno & Reisinger, Markus & Rey, Patrick, 2017. "Vertical Foreclosure and Multi-Segment Competition," TSE Working Papers 17-876, Toulouse School of Economics (TSE).
    5. Mandy, David M. & Mayo, John W. & Sappington, David E.M., 2016. "Targeting efforts to raise rivals' costs: Moving from “Whether” to “Whom”," International Journal of Industrial Organization, Elsevier, vol. 46(C), pages 1-15.
    6. Hunold, Matthias, 2017. "Backward ownership, uniform pricing and entry deterrence," DICE Discussion Papers 250, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    7. Nucciarelli, Alberto & Castaldo, Angelo & Conte, Elisabetta & Sadowski, Bert, 2013. "Unlocking the potential of Italian broadband: Case studies and policy lessons," Telecommunications Policy, Elsevier, vol. 37(10), pages 955-969.
    8. Johan Hombert & Jérôme Pouyet & Nicolas Schutz, 2009. "Anticompetitive vertical mergers waves," PSE Working Papers hal-00440143, HAL.
    9. Matsushima, Noriaki & Mizuno, Keizo, 2014. "Competition for access provision: Infrastructure upgrades with spillovers," 25th European Regional ITS Conference, Brussels 2014 101419, International Telecommunications Society (ITS).
    10. Hunold, Matthias & Röller, Lars-Hendrik & Stahl, Konrad, 2012. "Backwards integration and strategic delegation," ZEW Discussion Papers 12-022, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    11. Bourreau Marc & Dogan Pinar, 2012. "Level of Access and Competition in Broadband Markets," Review of Network Economics, De Gruyter, vol. 11(1), pages 1-33, March.
    12. Bourreau, Marc & Cambini, Carlo & Hoernig, Steffen, 2015. "Geographic access markets and investments," Information Economics and Policy, Elsevier, vol. 31(C), pages 13-21.
    13. Bourreau, Marc & Cambini, Carlo & Hoernig, Steffen, 2012. "Geographic Access Rules and Investments," CEPR Discussion Papers 9013, C.E.P.R. Discussion Papers.
    14. Marc Bourreau & Johan Hombert & Jerome Pouyet & Nicolas Schutz, 2011. "Upstream Competition between Vertically Integrated Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 677-713, December.
    15. Vogelsang Ingo, 2013. "The Endgame of Telecommunications Policy? A Survey," Review of Economics, De Gruyter, vol. 64(3), pages 193-270, December.
    16. Adriano Basso & Pietro, 2016. "Would David be more likely to speak to Angela under national roaming?," RSCAS Working Papers 2016/57, European University Institute.
    17. Franz Wirl, 2015. "Downstream and upstream oligopolies when retailer’s effort matters," Journal of Economics, Springer, vol. 116(2), pages 99-127, October.
    18. Hunold, Matthias & Röller, Lars-Hendrik & Stahl, Konrad, 2012. "Backwards Integration and Strategic Delegation," CEPR Discussion Papers 8910, C.E.P.R. Discussion Papers.
    19. Dogan, Pinar & Bourreau, Marc & Manant, Matthieu, 2010. "A Critical Review of the “Ladder of Investment†Approach," Scholarly Articles 4777447, Harvard Kennedy School of Government.
    20. Horstmann, Niklas & Krämer, Jan & Schnurr, Daniel, 2015. "Upstream Competition and Open Access Regimes: Experimental Evidence," 26th European Regional ITS Conference, Madrid 2015 127149, International Telecommunications Society (ITS).
    21. Lestage, Romain & Flacher, David, 2014. "Infrastructure investment and optimal access regulation in the different stages of telecommunications market liberalization," Telecommunications Policy, Elsevier, vol. 38(7), pages 569-579.
    22. Romain Lestage & David Flacher, 2011. "Access Regulation and Welfare," TEMEP Discussion Papers 201185, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Dec 2011.
    23. Luciano Fanti & Marcella Scrimitore, 2017. "How to compete? Cournot vs. Bertrand in a vertical structure with an integrated input supplier," Discussion Papers 2017/221, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

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