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On The Competitive Effects Of Vertical Integration Under Product Differentiation


  • Ramón Faulí-Oller

    () (Universidad de Alicante)

  • Joel Sandonís Díez

    () (Universidad de Alicante)


The result of neutrality of vertical integration for competition postulated by the Chicago School can be supported by a benchmark model with (1) an upstream monopolist, (2) homogeneous goods downstream and (3) observable (two-part tariff) contracts. The result does not hold however, whenever any of the three assumptions is relaxed. Rey and Tirole (1999) show that, with secret contracts, vertical integration is profitable and anticompetitive. The present paper shows that, adding an alternative supplier and product differentiation to the benchmark model, the effects of vertical integration depend on the efficiency level of the alternative supplier. When the alternative supply is relatively efficient, we also obtain that vertical integration is profitable and anticompetitive. However, when the alternative supplier is relatively inefficient, vertical integration becomes unprofitable and increases social welfare.

Suggested Citation

  • Ramón Faulí-Oller & Joel Sandonís Díez, 2003. "On The Competitive Effects Of Vertical Integration Under Product Differentiation," Working Papers. Serie AD 2003-31, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  • Handle: RePEc:ivi:wpasad:2003-31

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    References listed on IDEAS

    1. Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 25-51, March.
    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(3), pages 211-230, June.
    3. Riordan, Michael H, 1998. "Anticompetitive Vertical Integration by a Dominant Firm," American Economic Review, American Economic Association, vol. 88(5), pages 1232-1248, December.
    4. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-685, Winter.
    5. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-142, March.
    6. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 345-356.
    7. Fauli-Oller, Ramon & Sandonis, Joel, 2003. "To merge or to license: implications for competition policy," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 655-672, May.
    8. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    9. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Jay Pil Choi & Sang-Seung Yi, 2000. "Vertical Foreclosure with the Choice of Input Specifications," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 717-743, Winter.
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    More about this item


    Vertical integration; market foreclosure; two-part tariff contracts.;

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • D4 - Microeconomics - - Market Structure, Pricing, and Design


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