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Vertical Integration, Raising Rivals’ Costs and Upstream Collusion

  • Hans-Theo Normann


    (Royal Holloway College, Universiy of London)

This paper analyzes the impact vertical integration has on upstream collusion when the price of the input is linear. As a first step, the paper derives the collusive equilibrium that requires the lowest discount factor in the infinitely repeated game when one firm is vertically integrated. It turns out this is the joint-profit maximum of the colluding firms. The discount factor needed to sustain this equilibrium is then shown to be unambiguously lower than the one needed for collusion in the separated industry. While the previous literature has found it difficult to reconcile raising-rivals-costs strategies following a vertical merger with equilibrium behavior in the static game, they are subgame perfect in the repeated game studied here.

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Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2008_30.

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Date of creation: Aug 2008
Date of revision:
Handle: RePEc:mpg:wpaper:2008_30
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  1. repec:tpr:qjecon:v:103:y:1988:i:2:p:345-56 is not listed on IDEAS
  2. Yongmin Chen, 2000. "On Vertical Mergers and Their Competitive Effects," Econometric Society World Congress 2000 Contributed Papers 0383, Econometric Society.
  3. Rey, Patrick & Tirole, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005.
  4. Lucy White & Volker Nocke, 2004. "Do Vertical Mergers Facilitate Upstream Collusion?," 2004 Meeting Papers 45, Society for Economic Dynamics.
  5. Roman Inderst & Tommaso M. Valletti, 2011. "Buyer Power And The ‘Waterbed Effect’," Journal of Industrial Economics, Wiley Blackwell, vol. 59(1), pages 1-20, 03.
  6. 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.
  7. Michael Riordan, 1996. "Anticompetitive Vertical Integration by a Dominant Firm," Papers 0064, Boston University - Industry Studies Programme.
  8. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1992. "Equilibrium Vertical Foreclosure: Reply," American Economic Review, American Economic Association, vol. 82(3), pages 698-703, June.
  9. Hans-Theo Normann, 2004. "Equilibrium Vertical Foreclosure in the Repeated Game," Industrial Organization 0408008, EconWPA.
  10. Bolton, Patrick & Whinston, Michael D, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 121-48, January.
  11. Reiffen, David, 1992. "Equilibrium Vertical Foreclosure: Comment," American Economic Review, American Economic Association, vol. 82(3), pages 694-97, June.
  12. Deneckere, R., 1983. "Duopoly supergames with product differentiation," Economics Letters, Elsevier, vol. 11(1-2), pages 37-42.
  13. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  14. Cooper, James C. & Froeb, Luke M. & O'Brien, Dan & Vita, Michael G., 2005. "Vertical antitrust policy as a problem of inference," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 639-664, September.
  15. Roy Radner & Tatsuro Ichiishi, 1999. "A profit-center game with incomplete information," Review of Economic Design, Springer, vol. 4(4), pages 307-343.
  16. Yongmin Chen & Michael H. Riordan, 2007. "Vertical integration, exclusive dealing, and expost cartelization," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 1-21, 03.
  17. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, June.
  18. Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 25-51, 03.
  19. Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January.
  20. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
  21. Emmanuel Petrakis & Chrysovalantou Miliou & Nikos Vettas, 2009. "(In)efficient trading forms in competing vertical chains," Working Papers 0916, University of Crete, Department of Economics.
  22. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  23. 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.
  24. Choi, J.P. & Yi, S.S., 1997. "Vertical Foreclosure with the Choice of Input Specifications," Discussion Paper 1997-16, Tilburg University, Center for Economic Research.
  25. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
  26. 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.
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  28. 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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