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On Vertical Mergers and Their Competitive Effects

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  • Chen, Yongmin

Abstract

It is well known that vertical integration cats change the pricing incentive of an upstream producer. However, it has not been noticed that vertical integration may also change the pricing incentive of downstream producer and the incentive of a competitor in choosing input suppliers. I develop an equilibrium theory of vertical merger that incorporates these additional strategic considerations. Under fairly general conditions, a vertical merger will result in both efficiency gains and a collusive effect. The competitive effects of a vertical merger depend on the cost of switching suppliers and the degree of downstream product differentiation. Copyright 2001 by the RAND Corporation.

Suggested Citation

  • Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-685, Winter.
    • Handle: RePEc:rje:randje:v:32:y:2001:i:4:p:667-85
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