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When Backward Integration by a Dominant Firm Improves Welfare

  • Laurent Linnemer

This paper studies the welfare consequences of a vertical merger that raises rivals‘ costs when downstream competition is à la Cournot between firms with constant asymmetric marginal costs. The main result is that such a vertical merger can nevertheless improve welfare if it involves a downstream firm whose cost is “low enough“. This is because by raising the input price paid by the non-merging firms the merger thereby shifts production away from those relatively inefficient producers in favor of the more efficient firm. However there is a tradeoff between the gain in productive efficiency and the loss in consumers‘ surplus caused by a higher downstream price which follows a higher input price. It is also shown, through an example, that this result extends to price competition with differentiated products.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 740.

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Date of creation: 2002
Date of revision:
Handle: RePEc:ces:ceswps:_740
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  1. Joseph Farrell & Carl Shapiro, 1990. "Asset Ownership and Market Structure in Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 275-292, Summer.
  2. Eric Avenel & Corinne Barlet, 2000. "Vertical Foreclosure, Technological Choice, and Entry on the Intermediate Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(2), pages 211-230, 06.
  3. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1992. "Equilibrium Vertical Foreclosure: Reply," American Economic Review, American Economic Association, vol. 82(3), pages 698-703, June.
  4. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-42, March.
  5. Riordan, Michael H, 1998. "Anticompetitive Vertical Integration by a Dominant Firm," American Economic Review, American Economic Association, vol. 88(5), pages 1232-48, December.
  6. Gérard Gaudet & Ngo Van Long, 1995. "Vertical Integration, Foreclosure and Profits in the Presence of Double Marginalisation," CIRANO Working Papers 95s-40, CIRANO.
  7. Alexander Schrader & Stephen Martin, 1998. "Vertical Market Participation," Review of Industrial Organization, Springer, vol. 13(3), pages 321-331, June.
  8. Peterman, John L, 1975. "The Brown Shoe Case," Journal of Law and Economics, University of Chicago Press, vol. 18(1), pages 81-146, April.
  9. repec:oup:qjecon:v:103:y:1988:i:2:p:345-56 is not listed on IDEAS
  10. repec:oup:restud:v:52:y:1985:i:1:p:85-98 is not listed on IDEAS
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