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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.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 53 (2009)
Issue (Month): 4 (May)
Pages: 461-480

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Handle: RePEc:eee:eecrev:v:53:y:2009:i:4:p:461-480
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

Keywords: Collusion Foreclosure Raising rivals' costs Vertical integration;

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Find related papers by 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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Cited by:

  1. Sara Biancini & David Ettinger, 2016. "Vertical Integration and Downstream Collusion," CESifo Working Paper Series 5933, CESifo Group Munich.
  2. 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.
  3. 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.
  4. Bian, Junsong & Lai, Kin Keung & Hua, Zhongsheng, 2013. "Upstream collusion and downstream managerial incentives," Economics Letters, Elsevier, vol. 118(1), pages 97-100.
  5. 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).
  6. Salvatore Piccolo & Markus Reisinger, 2011. "Exclusive Territories and Manufacturers' Collusion," Management Science, INFORMS, vol. 57(7), pages 1250-1266, July.
  7. Mariana Cunha & Paula Sarmento, 2012. "Does Vertical Integration Promote Downstream Incomplete Collusion? An Evaluation of Static and Dynamic Stability," FEP Working Papers 465, Universidade do Porto, Faculdade de Economia do Porto.
  8. 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).
  9. 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.
  10. Jiyun Cao & Arijit Mukherjee, 2014. "Market Power of the Input Supplier, Technology Transfer and Consumer Welfare," CESifo Working Paper Series 5093, CESifo Group Munich.
  11. Christian Traxler, 2009. "Majority Voting and the Welfare Implications of Tax Avoidance," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2009_22, Max Planck Institute for Research on Collective Goods.
  12. Inderst, Roman & Valletti, Tommaso, 2011. "Incentives for input foreclosure," European Economic Review, Elsevier, vol. 55(6), pages 820-831, August.

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