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Demand-Driven Integration and Divorcement Policy

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  • Legros, Patrick
  • Newman, Andrew

Abstract

Industrial organization's concern with vertical integration has traditionally been limited to considering the effects on market outcomes, in particular product prices: they increase because integration enhances market power, or they decrease because it yields efficiency gains. This note offers a theoretical argument for reverse causality, from prices -- more generally, demand -- to integration. If, as many organizational theories in suggest, integration has positive effects on production efficiency and has any costs that are largely independent of output, then bearing those costs is more attractive when prices are higher, as when there is high demand. Therefore high prices lead to more integration. We discuss evidence for this reverse causality and its implications for regulation.

Suggested Citation

  • Legros, Patrick & Newman, Andrew, 2015. "Demand-Driven Integration and Divorcement Policy," CEPR Discussion Papers 10914, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10914
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    More about this item

    Keywords

    OIO; reverse causality; theory of the firm; vertical integration;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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