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The strategic value of partial vertical integration

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  • Fiocco, Raffaele

Abstract

We investigate the strategic incentives for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when retailers privately know their costs and engage in price competition with differentiated goods. The partial misalignment between the profit objectives within a partially integrated manufacturer–retailer hierarchy implies a higher retail price than under full integration. This ‘information vertical effect’ translates into a ‘competition horizontal effect’: the partially integrated hierarchy's commitment to a higher price induces the competitor to increase its price, which strategically relaxes competition. Our analysis provides implications for vertical merger policy and theoretical support for the recently documented empirical evidence on partial vertical acquisitions.

Suggested Citation

  • Fiocco, Raffaele, 2016. "The strategic value of partial vertical integration," European Economic Review, Elsevier, vol. 89(C), pages 284-302.
  • Handle: RePEc:eee:eecrev:v:89:y:2016:i:c:p:284-302
    DOI: 10.1016/j.euroecorev.2016.07.006
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    More about this item

    Keywords

    Asymmetric information; Partial vertical integration; Vertical mergers; Vertical restraints;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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