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Vertical integration without intrafirm trade

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  • Milliou, Chrysovalantou

Abstract

This paper shows that a vertically integrated firm has incentives to outsource input production to an equally efficient nonintegrated upstream firm that serves its downstream rival. By outsourcing, it raises both its own and its rivals’ cost and generates softer price competition in the final product market. Both the positive implications of vertical integration on the integrated firm’s profits and its negative implications on consumers and welfare are stronger with outsourcing than with the commonly presumed insourcing.

Suggested Citation

  • Milliou, Chrysovalantou, 2020. "Vertical integration without intrafirm trade," Economics Letters, Elsevier, vol. 192(C).
  • Handle: RePEc:eee:ecolet:v:192:y:2020:i:c:s016517652030135x
    DOI: 10.1016/j.econlet.2020.109180
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    References listed on IDEAS

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    More about this item

    Keywords

    Vertical integration; Two-part tariffs; Raising rivals’ cost; Outsourcing;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • 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
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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