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Vertical integration as a source of hold-up: An experiment

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  • Allain, Marie-Laure
  • Chambolle, Claire
  • Rey, Patrick
  • Teyssier, Sabrina

Abstract

In a vertical chain in which two rivals invest before contracting with one of two competing suppliers, vertical integration can create hold-up problems for the rival. We develop an experiment to test this theoretical prediction in a setup in which suppliers can either pre-commit ex ante to being greedy or degrade ex post the input they provide to their customer. Our experimental results confirm that vertical integration creates hold-up problems. However, vertical integration also generates more departures from theory, which can be explained by bounded rationality and social preferences.

Suggested Citation

  • Allain, Marie-Laure & Chambolle, Claire & Rey, Patrick & Teyssier, Sabrina, 2021. "Vertical integration as a source of hold-up: An experiment," European Economic Review, Elsevier, vol. 137(C).
    • Handle: RePEc:eee:eecrev:v:137:y:2021:i:c:s0014292121001367
    DOI: 10.1016/j.euroecorev.2021.103783
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    Cited by:

    1. Möllers, Claudia, 2016. "Reputation and foreclosure with vertical integration: Experimental evidence," DICE Discussion Papers 232, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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    More about this item

    Keywords

    Vertical integration; Hold-up; Experimental economics; Bounded rationality; Social preferences;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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