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Asymmetric Vertical Integration

Author

Listed:
  • Buehler Stefan

    (University of Zurich and University of St. Gallen)

  • Schmutzler Armin

    (University of Zurich, CEPR and ENCORE)

Abstract

We examine vertical backward integration in a reduced-form model of successive oligopolies. Our key findings are: (i) There may be asymmetric equilibria where some firms integrate and others remain separated, even if firms are symmetric initially; (ii) Efficient firms are more likely to integrate vertically. As a result, integrated firms also tend to have a large market share. The driving force behind these findings are demand/mark-up complementarities in the product market. We also identify countervailing forces resulting from strong vertical foreclosure, upstream sales and endogenous acquisition costs.

Suggested Citation

  • Buehler Stefan & Schmutzler Armin, 2005. "Asymmetric Vertical Integration," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 5(1), pages 1-27, January.
  • Handle: RePEc:bpj:bejtec:v:advances.5:y:2005:i:1:n:1
    DOI: 10.2202/1534-5963.1164
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    References listed on IDEAS

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    1. Gärtner, Dennis L. & Halbheer, Daniel, 2009. "Are there waves in merger activity after all?," International Journal of Industrial Organization, Elsevier, vol. 27(6), pages 708-718, November.
    2. Borek, Thomas & Bühler, Stefan & Schmutzler, Armin, 2003. "Weddings with Uncertain Prospects - Mergers under Asymmetric Information," CEPR Discussion Papers 3839, C.E.P.R. Discussion Papers.
    3. Yves Schneider & Peter Zweifel, 2004. "How Much Internalization of Nuclear Risk Through Liability Insurance?," Journal of Risk and Uncertainty, Springer, vol. 29(3), pages 219-240, December.
    4. Buehler, Stefan & Schmutzler, Armin & Benz, Men-Andri, 2004. "Infrastructure quality in deregulated industries: is there an underinvestment problem?," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 253-267, February.
    5. Zava Aydemir & Stefan Buehler, 2002. "Estimating Vertical Foreclosure in U.S. Gasoline Supply," SOI - Working Papers 0212, Socioeconomic Institute - University of Zurich.
    6. Thomas Borek & Stefan Buehler & Armin Schmutzler, 2004. "Mergers under Asymmetric Information � Is there a Lemons Problem?," SOI - Working Papers 0408, Socioeconomic Institute - University of Zurich.
    7. Rainer Winkelmann, 2002. "Subjektive Daten in der empirischen Wirtschaftsforschung: Probleme und Perspektiven," SOI - Working Papers 0207, Socioeconomic Institute - University of Zurich, revised Jul 2002.
    8. Mahler, Philippe & Winkelmann, Rainer, 2004. "Single Motherhood and (Un)Equal Educational Opportunities: Evidence for Germany," IZA Discussion Papers 1391, Institute of Labor Economics (IZA).
    9. Daniel Halbheer & Sarah Niggli & Armin Schmutzler, 2006. "What Does it Take to Sell Environmental Policy? An Empirical Analysis of Referendum Data," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 33(4), pages 441-462, April.
    10. Bühler, Stefan & Schmutzler, Armin, 2003. "Who Integrates?," CEPR Discussion Papers 4066, C.E.P.R. Discussion Papers.
    11. Thomas Borek & Stefan Buehler & Armin Schmutzler, 2002. "Weddings with Uncertain Prospects � Mergers under Asymmetric Information," SOI - Working Papers 0213, Socioeconomic Institute - University of Zurich, revised Feb 2004.
    12. Slade, Margaret E, 1998. "Strategic Motives for Vertical Separation: Evidence from Retail Gasoline Markets," Journal of Law, Economics, and Organization, Oxford University Press, vol. 14(1), pages 84-113, April.
    13. Andreas Polk, 2002. "Multilateral Agreement On Investments (MAI) - A Critical Assessment From an Industrial Economics Point of View," SOI - Working Papers 0201, Socioeconomic Institute - University of Zurich, revised Feb 2002.
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    Citations

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    Cited by:

    1. Noriaki Matsushima & Tomomichi Mizuno, 2007. "Why do large firms tend to integrate vertically? - asymmetric vertical integration reconsidered -," Discussion Papers 2007-34, Kobe University, Graduate School of Business Administration.
    2. Kensuke Kubo, 2011. "Explaining vertical integration in the generic pharmaceutical industry," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 11-02, Indian Statistical Institute, New Delhi, India.
    3. Rossini, Gianpaolo, 2005. "Outsourcing with labor management," Economic Systems, Elsevier, vol. 29(4), pages 455-466, December.
    4. Buehler, Stefan & Burghardt, Dirk, 2013. "Globalization and Vertical Structure: An Empirical Investigation," Economics Working Paper Series 1310, University of St. Gallen, School of Economics and Political Science.
    5. Schmutzler, Armin, 2010. "The relation between competition and innovation -- Why is it such a mess?," CEPR Discussion Papers 7640, C.E.P.R. Discussion Papers.
    6. Buehler, Stefan & Boom, Anette, 2014. "Restructuring the Electricity Industry: Vertical Structure and the Risk of Rent Extraction," Economics Working Paper Series 1437, University of St. Gallen, School of Economics and Political Science.
    7. Friedel Bolle & Yves Breitmoser, 2011. "Transaction Costs and Capacity Costs as Interrelated Determinants of Vertical Integration in Oligopolies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(2), pages 266-290, June.
    8. Thomas Borek & Stefan Bühler & Armin Schmutzler, 2008. "Analyzing Mergers under Asymmetric Information: A Simple Reduced-Form Approach," University of St. Gallen Department of Economics working paper series 2008 2008-15, Department of Economics, University of St. Gallen.
    9. Thomas, Charles J., 2011. "Vertical mergers in procurement markets," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 200-209, March.
    10. Leahy Dermot & Montagna Catia, 2017. "Economising, Strategising and the Vertical Boundaries of the firm," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 17(1), pages 1-35, January.
    11. G. Rossini, 2005. "Pitfalls in private and social incentives of vertical crossborder outsourcing," Working Papers 536, Dipartimento Scienze Economiche, Universita' di Bologna.
    12. Buehler, Stefan & Schmutzler, Armin, 2008. "Intimidating competitors -- Endogenous vertical integration and downstream investment in successive oligopoly," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 247-265, January.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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