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Vertical integration, raising rivals' costs and upstream collusion

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  • Normann, Hans-Theo

Abstract

This paper analyzes the impact vertical integration has on upstream collusion when the price of the input is linear. As a first step, the paper derives the collusive equilibrium that requires the lowest discount factor in the infinitely repeated game when one firm is vertically integrated. It turns out this is the joint-profit maximum of the colluding firms. The discount factor needed to sustain this equilibrium is then shown to be unambiguously lower than the one needed for collusion in the separated industry. While the previous literature has found it difficult to reconcile raising-rivals'-costs strategies following a vertical merger with equilibrium behavior in the static game, they are subgame perfect in the repeated game studied here.

Suggested Citation

  • Normann, Hans-Theo, 2009. "Vertical integration, raising rivals' costs and upstream collusion," European Economic Review, Elsevier, vol. 53(4), pages 461-480, May.
  • Handle: RePEc:eee:eecrev:v:53:y:2009:i:4:p:461-480
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    Cited by:

    1. Mariana Cunha & Paula Sarmento, 2014. "Does Vertical Integration Promote Downstream Incomplete Collusion? An Evaluation of Static and Dynamic Stability," Journal of Industry, Competition and Trade, Springer, vol. 14(1), pages 1-38, March.
    2. Qing, Qiankai & Deng, Tianhu & Wang, Hongwei, 2017. "Capacity allocation under downstream competition and bargaining," European Journal of Operational Research, Elsevier, vol. 261(1), pages 97-107.
    3. Inderst, Roman & Valletti, Tommaso, 2011. "Incentives for input foreclosure," European Economic Review, Elsevier, vol. 55(6), pages 820-831, August.
    4. Markus Reisinger & Tim Paul Thomes, 2017. "Manufacturer collusion: Strategic implications of the channel structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(4), pages 923-954, December.
    5. repec:eee:indorg:v:53:y:2017:i:c:p:99-113 is not listed on IDEAS
    6. Salvatore Piccolo & Markus Reisinger, 2011. "Exclusive Territories and Manufacturers' Collusion," Management Science, INFORMS, vol. 57(7), pages 1250-1266, July.
    7. Joseph A. Clougherty & Tomaso Duso, 2010. "Using Rival Effects to Identify Synergies and Improve Merger Typologies," CIG Working Papers SP II 2010-13, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    8. Jiyun Cao & Arijit Mukherjee, 2014. "Market Power of the Input Supplier, Technology Transfer and Consumer Welfare," CESifo Working Paper Series 5093, CESifo Group Munich.
    9. Éric Avenel & Stéphane Caprice, 2012. "Collusion and downstream entry in a vertically integrated industry," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201208, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    10. Pouyet, Jérôme & Trégouët, Thomas, 2016. "Vertical Mergers in Platform Markets," CEPR Discussion Papers 11703, C.E.P.R. Discussion Papers.
    11. Avenel, Eric & Caprice, Stéphane, 2015. "Collusion et possibilité d’entrée en aval dans une industrie verticalement intégrée," TSE Working Papers 15-613, Toulouse School of Economics (TSE).
    12. Teichmann, Isabel & von Schlippenbach, Vanessa, 2015. "Collusive effects of a monopolist's use of an intermediary to deliver to retailers," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112948, Verein für Socialpolitik / German Economic Association.
    13. repec:bla:manchs:v:85:y:2017:i:4:p:430-449 is not listed on IDEAS
    14. Han, Aiping & Ge, Jianping & Lei, Yalin, 2016. "Vertical vs. horizontal integration: Game analysis for the rare earth industrial integration in China," Resources Policy, Elsevier, vol. 50(C), pages 149-159.
    15. Möllers, Claudia, 2016. "Reputation and foreclosure with vertical integration: Experimental evidence," DICE Discussion Papers 232, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    16. Christian Traxler, 2009. "Majority Voting and the Welfare Implications of Tax Avoidance," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2009_22, Max Planck Institute for Research on Collective Goods.
    17. Biancini, Sara & Ettinger, David, 2017. "Vertical integration and downstream collusion," International Journal of Industrial Organization, Elsevier, vol. 53(C), pages 99-113.
    18. S. Bolatto & L. Lambertini, 2017. "Collusive Vertical Relations," Working Papers wp1103, Dipartimento Scienze Economiche, Universita' di Bologna.
    19. Basant, Rakesh & Mishra, Pulak, 2017. "Vertical Integration, Market Structure and Competition Policy: Experiences of Indian Manufacturing Sector during the Post Reform Period," IIMA Working Papers WP 2017-09-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    20. Isabel Teichmann & Vanessa von Schlippenbach, 2014. "Collusive Effects of a Monopolist's Use of an Intermediary to Deliver to Retailers," Discussion Papers of DIW Berlin 1440, DIW Berlin, German Institute for Economic Research.
    21. Bian, Junsong & Lai, Kin Keung & Hua, Zhongsheng, 2013. "Upstream collusion and downstream managerial incentives," Economics Letters, Elsevier, vol. 118(1), pages 97-100.

    More about this item

    Keywords

    Collusion Foreclosure Raising rivals' costs Vertical integration;

    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
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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