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Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices

  • Ali Hortaçsu
  • Chad Syverson

This paper empirically investigates the possible market power effects of vertical integration proposed in the theoretical literature on vertical foreclosure. It uses a rich data set of cement and ready-mixed concrete plants that spans several decades to perform a detailed case study. There is little evidence that foreclosure is quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. These patterns are consistent, however, with an alternative efficiency-based mechanism. Namely, higher-productivity producers are more likely to vertically integrate and are also larger, more likely to survive, and more likely to charge lower prices. We find evidence that integrated producers’ productivity advantage is tied to improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not due to firms’ vertical structures per se: nonvertical firms with large local concrete operations have similarly high productivity levels.

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File URL: http://dx.doi.org/10.1086/514347
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 115 (2007)
Issue (Month): ()
Pages: 250-301

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Handle: RePEc:ucp:jpolec:v:115:y:2007:p:250-301
DOI: 10.1086/514347
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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