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Vertical Integration, Market Foreclosure And Quality Investment

  • Roberto Hernan

    ()

  • Praveen Kujal

    ()

Incentives to vertically integrate are studied in an industry where downstream firms are vertically differentiated. Vertical integration by one of the firms increases production costs for the rival. Increased production costs impact quality investment both by the integrated firm and the unintegrated rival. A firm, integrating first, always produces the high quality good and earns higher profits. Quality investment by both firms decreases under any (vertical integration) scenario and competition among downstream firms is softened. A fully integrated industry, with increased product differentiation, is observed in equilibrium. Due to increase in firm profits, social welfare under this structure is greater than under no integration.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we061405.

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Date of creation: Feb 2006
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Handle: RePEc:cte:werepe:we061405
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