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Vertical Integration and Downstream Collusion

Listed author(s):
  • Sara Biancini
  • David Ettinger

We investigate the effect of a vertical merger on downstream firms’ ability to collude in a repeated game framework. We show that a vertical merger has two main effects. On the one hand, it increases the total collusive profits, increasing the stakes of collusion. On the other hand, it creates an asymmetry between the integrated firm and the unintegrated competitors. The integrated firm, accessing the input at marginal cost, faces higher profits in the deviation phase and in the non cooperative equilibrium, which potentially harms collusion. As we show, the optimal collusive profit-sharing agreement takes care of the increased incentive to deviate of the integrated firm, while optimal punishment erases the difficulty related to the asymmetries in the non cooperative state. As a result, vertical integration generally favors collusion.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2016/wp-cesifo-2016-06/cesifo1_wp5933.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 5933.

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Date of creation: 2016
Handle: RePEc:ces:ceswps:_5933
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  1. Normann, Hans-Theo, 2009. "Vertical integration, raising rivals' costs and upstream collusion," European Economic Review, Elsevier, vol. 53(4), pages 461-480, May.
  2. Volker Nocke & Lucy White, 2007. "Do Vertical Mergers Facilitate Upstream Collusion?," American Economic Review, American Economic Association, vol. 97(4), pages 1321-1339, September.
  3. Yongmin Chen & Michael H. Riordan, 2007. "Vertical integration, exclusive dealing, and expost cartelization," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 1-21, 03.
  4. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-396, March.
  5. Jeanine Miklós-Thal, 2011. "Optimal collusion under cost asymmetry," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(1), pages 99-125, January.
  6. Salvatore Piccolo & Jeanine Miklós-Thal, 2012. "Colluding through suppliers," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 492-513, 09.
  7. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-685, Winter.
  8. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
  9. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-142, March.
  10. Pedro Mendi, 2009. "Backward integration and collusion in a duopoly model with asymmetric costs," Journal of Economics, Springer, vol. 96(2), pages 95-112, March.
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