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Vertical Integration as a Source of Hold-up

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  • Marie-Laure Allain
  • Claire Chambolle
  • Patrick Rey

Abstract

While vertical integration is traditionally seen as a solution to the hold-up problem, this article highlights instead that it can generate hold-up problems—for rivals. We consider a successive duopoly where downstream firms invest and then secure support from an upstream supplier. We first show that vertical integration generates ex ante incentives to create hold-up problems: an integrated supplier is willing to pre-commit itself to appropriating or dissipating part of its customer's profits, to expose the independent rival to being held-up by the other supplier, and discourage in this way the rival's investment. We then show that, even in the absence of any pre-commitment, vertical integration also creates hold-up problems ex post when degrading the quality of the support provided to one downstream firm benefits its rival. We also provide illustrations in terms of standard industrial organization models and of antitrust cases, and discuss the robustness of the insights.

Suggested Citation

  • Marie-Laure Allain & Claire Chambolle & Patrick Rey, 2016. "Vertical Integration as a Source of Hold-up," Review of Economic Studies, Oxford University Press, vol. 83(1), pages 1-25.
  • Handle: RePEc:oup:restud:v:83:y:2016:i:1:p:1-25.
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    File URL: http://hdl.handle.net/10.1093/restud/rdv035
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    Cited by:

    1. Zanchettin, Piercarlo & Mukherjee, Arijit, 2017. "Vertical integration and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 25-57.
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    3. Choné, Philippe & Linnemer, Laurent & Vergé, Thibaud, 2021. "Double marginalization and vertical integration," CEPR Discussion Papers 15849, C.E.P.R. Discussion Papers.
    4. Benoit Voudon, 2019. "Vertical Integration in the presence of a Cost-Reducing Technology," Trinity Economics Papers tep0919, Trinity College Dublin, Department of Economics.
    5. 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).
    6. 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).
    7. Gilbert, Richard J., 2021. "Separation: A Cure for Abuse of Platform Dominance?," Information Economics and Policy, Elsevier, vol. 54(C).
    8. Ping Lin & Tianle Zhang & Wen Zhou, 2020. "Vertical integration and disruptive cross‐market R&D," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 51-73, January.
    9. Hunold, Matthias & Schlütter, Frank, 2022. "Supply Contracts under Partial Forward Ownership," LIDAM Discussion Papers CORE 2022003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    10. Simon Loertscher & Leslie M. Marx, 2022. "Incomplete Information Bargaining with Applications to Mergers, Investment, and Vertical Integration," American Economic Review, American Economic Association, vol. 112(2), pages 616-649, February.
    11. Zhijun Chen, 2021. "Price Squeezes as an Exploitative Abuse," Monash Economics Working Papers 2021-05, Monash University, Department of Economics.
    12. Choi, Jay Pil & Yi, Sang-Seung, 2016. "An equilibrium model of investment-reducing vertical integration," Research in Economics, Elsevier, vol. 70(4), pages 659-676.
    13. Benoit Voudon, 2019. "Technology Adoption under Asymmetric Market Structure," Trinity Economics Papers tep0819, Trinity College Dublin, Department of Economics.
    14. 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).
    15. Chul-Hi Park & Toshihiro Matsumura & Sang-Ho Lee, 2022. "Procurement of advanced inputs and welfare-reducing vertical integration," Journal of Economics, Springer, vol. 135(3), pages 255-283, April.
    16. Milliou, Chrysovalantou & Petrakis, Emmanuel, 2019. "Vertical integration and knowledge disclosure," Economics Letters, Elsevier, vol. 177(C), pages 9-13.
    17. Lee, Sang-Ho & Matsumura, Toshihiro & Park, Chul-Hi, 2017. "Procurement of Advanced Technology and Welfare-Reducing Vertical Integration," MPRA Paper 79109, University Library of Munich, Germany.
    18. Hunold, Matthias & Schad, Jannika, 2021. "Single monopoly profits, vertical mergers, and downstream entry deterrence," DICE Discussion Papers 373, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    19. Hunold, Matthias & Schlütter, Frank, 2019. "Vertical financial interest and corporate influence," DICE Discussion Papers 309, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    20. Gregor Langus & Vilen Lipatov & Jorge Padilla, 2019. "Non-horizontal mergers with investments into compatibility," CESifo Working Paper Series 7617, CESifo.

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    More about this item

    JEL classification:

    • 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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