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Transaction Costs and Capacity Costs as Interrelated Determinants of Vertical Integration in Oligopolies

  • Friedel Bolle
  • Yves Breitmoser

This paper considers a two-stage oligopoly model with downstream retailers and two types of transaction costs (in contracting retailers and in direct retailing). Our analysis shows how transaction costs affect vertical integration in a strategic model of oligopoly, and it relates transaction costs to other characteristics of oligopolistic industries. In particular, we show that long- and short-term capacity costs interrelate in a rather complex manner with transaction costs in determining the degree of vertical integration. Our analysis thus challenges the focus of New Institutional Economics on transaction costs. In light of the results, we finally discuss welfare implications of regulatory interventions.

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Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 167 (2011)
Issue (Month): 2 (June)
Pages: 266-290

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201106)167:2_266:tcacca_2.0.tx_2-9
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  1. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
  2. Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2003. "Competitions with Forward Contracts: A Laboratory Analysis Motivated by Electricity Market Design," Working Papers 66, Barcelona Graduate School of Economics.
  3. Apostolos Burnetas & Peter Ritchken, 2005. "Option Pricing with Downward-Sloping Demand Curves: The Case of Supply Chain Options," Management Science, INFORMS, vol. 51(4), pages 566-580, April.
  4. Karen L. Donohue, 2000. "Efficient Supply Contracts for Fashion Goods with Forecast Updating and Two Production Modes," Management Science, INFORMS, vol. 46(11), pages 1397-1411, November.
  5. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, vol. 108(1), pages 141-151, January.
  6. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  7. Stefan Buehler & Armin Schmutzler, 2003. "Asymmetric Vertical Integration," SOI - Working Papers 0306, Socioeconomic Institute - University of Zurich, revised Nov 2004.
  8. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
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