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Merge and Compete. Strategic incentives for vertical integration

  • Filippo Vergara Caffarelli


    (Bank of Italy)

Vertical integration followed by quantity competition is studied. In the first stage of the game downstream firms simultaneously decide whether to integrate with one of the upstream suppliers. If firms are not able to observe whether their vertically integrated competitor enters the intermediate-good market then they are indifferent about vertical integration. If the entry choice of the integrated firm is observable then the unique equilibrium involves vertical integration and in-house production of the intermediate good. The importance of entry observability sheds light on the strategic importance of information exchange institutions such as the internet and business fairs.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 608.

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Date of creation: Dec 2006
Date of revision:
Handle: RePEc:bdi:wptemi:td_608_06
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  1. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Bagella Michele & Becchetti Leonardo, 1999. "Effetto distretto e performance delle esportazioni sotto diversi regimi di cambio: analisi empirica e implicazioni per l'Euro," Politica economica - Journal of Economic Policy (PEJEP), Società editrice il Mulino, issue 2, pages 225-252.
  3. Inês CABRAL, 2002. "A Herding Approach to Merger Waves," Economics Working Papers ECO2002/26, European University Institute.
  4. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
  5. Sibley, David S. & Weisman, Dennis L., 1998. "Raising rivals' costs: The entry of an upstream monopolist into downstream markets," Information Economics and Policy, Elsevier, vol. 10(4), pages 451-470, December.
  6. Daron Acemoglu & Philippe Aghion & Rachel Griffith & Fabrizio Zilibotti, 2004. "Vertical Integration and Technology: Theory and Evidence," NBER Working Papers 10997, National Bureau of Economic Research, Inc.
  7. Dobson, Paul W & Waterson, Michael, 1997. "Countervailing Power and Consumer Prices," Economic Journal, Royal Economic Society, vol. 107(441), pages 418-30, March.
  8. Henrick Horn & Asher Wolinsky, 1988. "Bilateral Monopolies and Incentives for Merger," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 408-419, Autumn.
  9. Soubeyran, A. & Thisse, J.-F., 1998. "Learning-by-Doing and the Development of Industrial Districts," G.R.E.Q.A.M. 98a26, Universite Aix-Marseille III.
  10. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," NBER Working Papers 8728, National Bureau of Economic Research, Inc.
  11. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  12. Maness, Robert, 1996. "Incomplete contracts and the choice between vertical integration and franchising," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 101-115, October.
  13. Volker Nocke & Lucy White, 2003. "Do Vertical Mergers Facilitate Upstream Collusion? Second Version," PIER Working Paper Archive 05-013, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 08 Mar 2005.
  14. Gianmarco I.P. Ottaviano, 2000. "Ad usum delphini: A Primer in "New Economy Geography"," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 59(1), pages 89-116, April.
  15. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  16. Francesco Brioschi & Maria Sole Brioschi & Giulio Cainelli, 2002. "From the industrial district to the district group: An insight into the evolution of capitalism in italy1," Regional Studies, Taylor & Francis Journals, vol. 36(9), pages 1037-1052.
  17. Lieberman, Marvin B, 1991. "Determinants of Vertical Integration: An Empirical Test," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 451-66, September.
  18. repec:oup:qjecon:v:117:y:2002:i:1:p:85-120 is not listed on IDEAS
  19. repec:oup:qjecon:v:103:y:1988:i:2:p:345-56 is not listed on IDEAS
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