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Vertical Integration and Market Foreclosure with Convex Downstream Costs

  • Pio Baake
  • Ulrich Kamecke
  • Hans-Theo Normann

In a framework with an upstream monopoly and a downstream duopoly, we analyze the impact of convex costs on the downstream level. In constrast to the case of constant marginal costs, vertical integration does not imply complete market foreclosure. While the nonintegrated downstream ¯rm receives a strictly positive amount of the intermediate good, the downstream allocation is ine±cient. However, a parametrized example indicates that competition at the downstream level may increase aggregate welfare.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.38499.de/dp260.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 260.

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Length: 11 p.
Date of creation: 2001
Date of revision:
Handle: RePEc:diw:diwwpp:dp260
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  1. Reiffen, David, 1992. "Equilibrium Vertical Foreclosure: Comment," American Economic Review, American Economic Association, vol. 82(3), pages 694-97, June.
  2. Martin, Stephen & Normann, Hans-Theo & Snyder, Christopher M, 2001. "Vertical Foreclosure in Experimental Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 466-96, Autumn.
  3. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn.
  5. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
  6. 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.
  7. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  8. Alexander, Cindy R & Reiffen, David, 1995. "Vertical Contracts as Strategic Commitments: How Are They Enforced?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 623-49, Winter.
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