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Upstream Competition between Vertically Integrated Firms

  • Marc Bourreau

    (Institut Télécom - Télécom ParisTech - Télécom ParisTech, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)

  • Johan Hombert

    (HEC Paris - GROUPE HEC)

  • Jérôme Pouyet

    (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA))

  • Nicolas Schutz

    (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

We propose a model of two-tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous input, the Bertrand result may not obtain, and the input may be priced above marginal cost in equilibrium, which is detrimental to consumers' surplus and social welfare. We obtain that these partial foreclosure equilibria are more likely to exist when downstream competition is fierce. We then use our model to assess the impact of several regulatory tools in the telecommunications industry.

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Paper provided by HAL in its series PSE Working Papers with number hal-00440126.

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Date of creation: 09 Dec 2009
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Handle: RePEc:hal:psewpa:hal-00440126
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  1. Marc Bourreau & Johan Hombert & Jerome Pouyet & Nicolas Schutz, 2011. "Upstream Competition between Vertically Integrated Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 677-713, December.
  2. Lucy White & Volker Nocke, 2004. "Do Vertical Mergers Facilitate Upstream Collusion?," 2004 Meeting Papers 45, Society for Economic Dynamics.
  3. Duarte Brito & Pedro Pereira, 2010. "Access to Bottleneck Inputs under Oligopoly: A Prisoners’ Dilemma?," Southern Economic Journal, Southern Economic Association, vol. 76(3), pages 660-677, January.
  4. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, June.
  5. Höffler, Felix & Schmidt, Klaus M., 2008. "Two tales on resale," Munich Reprints in Economics 19443, University of Munich, Department of Economics.
  6. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509, June.
  7. David E. M Sappington, 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1631-1638, December.
  8. Yongmin Chen & Michael H. Riordan, 2003. "Vertical Integration, Exclusive Dealing, and Ex Post Cartelization," Discussion Papers 0203-13, Columbia University, Department of Economics.
  9. repec:hal:wpaper:hal-00440126 is not listed on IDEAS
  10. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  11. repec:cup:cbooks:9780521066631 is not listed on IDEAS
  12. Fauli-Oller, Ramon & Sandonis, Joel, 2002. "Welfare reducing licensing," Games and Economic Behavior, Elsevier, vol. 41(2), pages 192-205, November.
  13. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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