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

  • Ali Hortacsu
  • 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 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: non-vertical firms with large local concrete operations have similarly high productivity levels.

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File URL: ftp://ftp2.census.gov/ces/wp/2008/CES-WP-08-41.pdf
File Function: First version, 2008
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Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 08-41.

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Length: 61 pages
Date of creation: Dec 2008
Date of revision:
Handle: RePEc:cen:wpaper:08-41
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  1. Eric J. Bartelsman & Mark Doms, 2000. "Understanding productivity: lessons from longitudinal microdata," Finance and Economics Discussion Series 2000-19, Board of Governors of the Federal Reserve System (U.S.).
  2. Michael Riordan, 1996. "Anticompetitive Vertical Integration by a Dominant Firm," Papers 0064, Boston University - Industry Studies Programme.
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  8. Ali Hortacsu & Chad Syverson, 2006. "Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices," Working Papers 06-21, Center for Economic Studies, U.S. Census Bureau.
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