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Vertical integration and product differentiation

  • Arijit Mukherjee


  • Piercarlo Zanchettin


We study horizontal product differentiation as a strategic decision of downstream firms facing a threat of vertical integration and market foreclosure by an upstream monopolist. We model product differentiation either as pure market segmentation or as generating positive value to consumers. Because of the threat of vertical integration, the downstream firms prefer more differentiation when the latter merely yields the anticompetitive effects of market segmentation, while they may prefer less differentiation when the latter would generate additional social value. Therefore, instead of market foreclosure, we indicate market segmentation or under-investment in socially valuable activities, such as product innovation, design, and informative advertising, as possible social costs of a lenient antitrust policy towards vertical mergers.

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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 12/17.

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Date of creation: Apr 2012
Date of revision: Sep 2012
Handle: RePEc:lec:leecon:12/17
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  1. Häckner, Jonas, 2001. "Vertical Integration and Competition Policy," Research Papers in Economics 2001:1, Stockholm University, Department of Economics.
  2. Volker Nocke & Lucy White, 2007. "Do Vertical Mergers Facilitate Upstream Collusion?," American Economic Review, American Economic Association, vol. 97(4), pages 1321-1339, September.
  3. Nicholas Economides, 1994. "Quality Choice and Vertical Integration," Working Papers 94-22, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Yongmin Chen, 2000. "On Vertical Mergers and Their Competitive Effects," Econometric Society World Congress 2000 Contributed Papers 0383, Econometric Society.
  5. 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.
  6. Lynne Pepall & George Norman, 2001. "Product Differentiation and Upstream-Downstream Relations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(2), pages 201-233, 06.
  7. Allain, Marie-Laure & Chambolle, Claire & Rey, Patrick, 2011. "Vertical Integration, Information and Foreclosure," TSE Working Papers 11-237, Toulouse School of Economics (TSE), revised Nov 2011.
  8. Matsushima, Noriaki, 2004. "Technology of upstream firms and equilibrium product differentiation," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1091-1114, November.
  9. Paul Belleflamme & Eric Toulemonde, 2003. "Product differentiation in successive vertical oligopolies," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 523-545, August.
  10. Arya, Anil & Mittendorf, Brian & Sappington, David E.M., 2008. "Outsourcing, vertical integration, and price vs. quantity competition," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 1-16, January.
  11. Noriaki Matsushima, 2009. "VERTICAL MERGERS AND PRODUCT DIFFERENTIATION -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 57(4), pages 812-834, December.
  12. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 345-356.
  13. Stefanadis, Christodoulos, 1997. "Downstream Vertical Foreclosure and Upstream Innovation," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 445-56, December.
  14. Brocas, Isabelle, 2003. "Vertical integration and incentives to innovate," International Journal of Industrial Organization, Elsevier, vol. 21(4), pages 457-488, April.
  15. Milliou, Chrysovalantou, 2004. "Vertical integration and R&D information flow: is there a need for 'firewalls'?," International Journal of Industrial Organization, Elsevier, vol. 22(1), pages 25-43, January.
  16. Buehler, Stefan & Schmutzler, Armin, 2008. "Intimidating competitors -- Endogenous vertical integration and downstream investment in successive oligopoly," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 247-265, January.
  17. Colangelo, Giuseppe, 1995. "Vertical vs. Horizontal Integration: Pre-emptive Merging," Journal of Industrial Economics, Wiley Blackwell, vol. 43(3), pages 323-37, September.
  18. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
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