The Nonequivalence Of Vertical Merger

The economic and legal view of vertical integration has varied over time. But, a constant source of concern is the fear that the integrated firm will foreclose competitors from intermediate markets. At the same time, most commentators have considered the economics of vertical contracts, especially exclusive dealing, to be essentially identical to vertical merger. Using the simple model of Comanor and Frech (1985), I show that vertical mergers and exclusive dealing contracts are not behaviorally equivalent. In particular, vertical mergers will not lead to foreclosure of rivals for anticompetitive reasons, while ordinary exclusive dealing contracts will lead to such anticompetitive foreclosure. Vertical mergers avoid certain externalities that exclusive dealing contracts create. In this model, vertical mergers can only cause anticompetitive problems through their horizontal aspects, by creating a monopoly of distributors. Of course, merger can always be mimicked be a complex enough contract between nominally independent parties. In this model, the more contract that mimic the merger requires two parties to agree on the price of a third party's products and is particularly subject to being undermined by price-cutting. Thus, it is like to be uncommon.