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Vertical integration, foreclosure, and productive efficiency

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  • Markus Reisinger
  • Emanuele Tarantino

Abstract

type="main"> We analyze the consequences of vertical integration by a monopoly producer dealing with two retailers (downstream firms) of varying efficiency via secret two-part tariffs. When integrated with the inefficient retailer, the monopoly producer does not foreclose the rival retailer due to an output-shifting effect. This effect can induce the integrated firm to engage in below-cost pricing at the wholesale level, thereby rendering integration procompetitive. Output shifting arises with homogeneous and differentiated products. Moreover, we show that integration with an inefficient retailer emerges in a model with uncertainty over retailers' costs, and this merger can be procompetitive in expectation.

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  • Markus Reisinger & Emanuele Tarantino, 2015. "Vertical integration, foreclosure, and productive efficiency," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 461-479, September.
  • Handle: RePEc:bla:randje:v:46:y:2015:i:3:p:461-479
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    File URL: http://hdl.handle.net/10.1111/1756-2171.12093
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    3. Larry G. Epstein & Hiroaki Kaido & Kyoungwon Seo, 2016. "Robust Confidence Regions for Incomplete Models," Econometrica, Econometric Society, vol. 84, pages 1799-1838, September.
    4. Claire Borsenberger & Helmuth Cremer & Denis Joram & Jean-Marie Lozachmeur & Estelle Malavolti, 2020. "Platform Competition: Market Structure and Pricing," Topics in Regulatory Economics and Policy, in: Pier Luigi Parcu & Timothy J. Brennan & Victor Glass (ed.), The Changing Postal Environment, pages 225-240, Springer.
    5. Eguia, Jon X. & Llorente-Saguer, Aniol & Morton, Rebecca & Nicolò, Antonio, 2018. "Equilibrium selection in sequential games with imperfect information," Games and Economic Behavior, Elsevier, vol. 109(C), pages 465-483.
    6. Chiara Fumagalli & Massimo Motta, 2018. "Dynamic Vertical Foreclosure," BAFFI CAREFIN Working Papers 1899, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    7. Chiara Fumagalli & Massimo Motta, 2019. "Dynamic Vertical Foreclosure," CSEF Working Papers 522, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    8. Borsenberger, Claire & Cremer, Helmuth & Joram, Denis & Lozachmeur, Jean-Marie & Malavolti, Estelle, 2020. "Data and the regulation of e-commerce: data sharing vs.dismantling," TSE Working Papers 20-1094, Toulouse School of Economics (TSE).
    9. Giulio Federico & Massimo Motta & Penelope Papandropoulos, 2015. "Recent Developments at DG Competition: 2014," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(4), pages 399-423, December.
    10. Chiara Fumagalli & Massimo Motta, 2019. "Dynamic Vertical Foreclosure," Working Papers 640, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    11. Bakaouka, Elpiniki & Milliou, Chrysovalantou, 2018. "Vertical licensing, input pricing, and entry," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 66-96.
    12. Fumagalli, Chiara & Motta, Massimo, 2017. "Dynamic Vertical Foreclosure," CEPR Discussion Papers 12498, C.E.P.R. Discussion Papers.
    13. Reisinger, Markus & Tarantino, Emanuele, 2016. "Patent Pools in Input Markets," CEPR Discussion Papers 11512, C.E.P.R. Discussion Papers.
    14. 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.
    15. Cong Pan, 2018. "Supplier Encroachment and Consumer Welfare: Upstream Firm’s Opportunism and Multichannel Distribution," ISER Discussion Paper 1020, Institute of Social and Economic Research, Osaka University.
    16. Noriaki Matsushima & Tomomichi Mizuno & Cong Pan, 2018. "A manufacturer's incentive to open its direct channel and its impact on welfare," ISER Discussion Paper 1026, Institute of Social and Economic Research, Osaka University.
    17. Hong Zhu & Qi Zhu, 2016. "Mergers and acquisitions by Chinese firms: A review and comparison with other mergers and acquisitions research in the leading journals," Asia Pacific Journal of Management, Springer, vol. 33(4), pages 1107-1149, December.
    18. Joachim Heinzel & Simon Hoof, 2020. "Oligopolistic Upstream Competition with Differentiated Inputs," Working Papers CIE 129, Paderborn University, CIE Center for International Economics.
    19. Moresi, Serge & Schwartz, Marius, 2017. "Strategic incentives when supplying to rivals with an application to vertical firm structure," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 137-161.
    20. Ioannis N. Pinopoulos, 2020. "Upstream horizontal mergers involving a vertically integrated firm," Journal of Economics, Springer, vol. 130(1), pages 67-83, June.
    21. Lømo, Teis Lunde, 2015. "Risk sharing mitigates opportunism in vertical contracting," Working Papers in Economics 10/15, University of Bergen, Department of Economics.
    22. Sylvain Sourisseau & Jean De Beir & Thai Ha Huy, 2017. "The effect of recycling over a mining oligopoly," Documents de recherche 17-05, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    23. Pinopoulos, Ioannis N., 2019. "On the welfare effects of vertical integration: Opportunism vs. double marginalization," Economics Letters, Elsevier, vol. 174(C), pages 169-172.

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