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Indirect versus Direct Constraints in Markets with Vertical Integration

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  • Roman Inderst
  • Tommaso Valletti

Abstract

For an assessment of market power on the wholesale (or merchant) market in the presence of vertically integrated firms, we analyze the interaction of direct constraints, arising from competition on the wholesale market, and of indirect constraints, arising from substitution on the retail market. A vertically integrated firm that still participates in the merchant market exerts both direct and indirect constraints. We analyze the factors that determine the importance of indirect constraints. We find that, in contrast to a common presumption, indirect constraints are sometimes more powerful than direct constraints. We furthermore analyze the incentives of integrated firms to still participate in the merchant market, provided that this is technologically feasible. Copyright © The editors of the "Scandinavian Journal of Economics" 2009. .

Suggested Citation

  • Roman Inderst & Tommaso Valletti, 2009. "Indirect versus Direct Constraints in Markets with Vertical Integration," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(3), pages 527-546, September.
  • Handle: RePEc:bla:scandj:v:111:y:2009:i:3:p:527-546
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    References listed on IDEAS

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    1. Catherine C. de Fontenay & Joshua S. Gans, 2005. "Vertical Integration in the Presence of Upstream Competition," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 544-572, Autumn.
    2. Joshua S. Gans, 2007. "Concentration-Based Merger Tests and Vertical Market Structure," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 661-681.
    3. Géarard Gaudet & Ngo Long, 1996. "Vertical Integration, Foreclosure, and profits in the Presence of Double Marginalization," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 409-432, September.
    4. Patrick Rey & Thibaud Vergé, 2004. "Bilateral Control with Vertical Contracts," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 728-746, Winter.
    5. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-230, March.
    6. 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. Inderst, Roman & Valletti, Tommaso, 2011. "Incentives for input foreclosure," European Economic Review, Elsevier, vol. 55(6), pages 820-831, August.
    2. Christos Constantatos & Ioannis Pinopoulos, 2013. "Accommodation effects in successive Cournot Oligopolies," Discussion Paper Series 2013_06, Department of Economics, University of Macedonia, revised Dec 2013.
    3. Ioannis Pinopoulos, 2014. "Downstream Market Power and the Lerner Index," Discussion Paper Series 2014_07, Department of Economics, University of Macedonia, revised Nov 2014.
    4. Ioannis N. Pinopoulos, 2014. "Equilibrium downstream mark-up and upstream free entry," Discussion Paper Series 2014_02, Department of Economics, University of Macedonia, revised Sep 2014.
    5. Erotokritos Varelas, 2014. "Bank structure and public debt," Discussion Paper Series 2014_06, Department of Economics, University of Macedonia, revised Sep 2014.
    6. Ioannis N. Pinopoulos, 2011. "Input foreclosure under alternative entry conditions in the upstream market," Discussion Paper Series 2011_15, Department of Economics, University of Macedonia, revised Nov 2011.

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