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Merge and compete: strategic incentives to vertical integration

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  • Filippo Vergara Caffarelli

Abstract

Vertical integration followed by quantity competition is studied. The downstream rms simultaneously decide whether to integrate with one of the upstream suppliers. If rms are not able to observe whether the vertically integrated competitor enters the intermediate good market, they are indifferent about vertical integration. However, if it is possible to observe the entry choice of the vertically integrated entity, the unique equilibrium involves vertical integration and in-house production of the intermediate good. The importance of entrys observability sheds light on the strategic importance of information exchange institutions such as the internet and business fairs.

Suggested Citation

  • Filippo Vergara Caffarelli, 2002. "Merge and compete: strategic incentives to vertical integration," Working Papers in Public Economics 65, Department of Economics and Law, Sapienza University of Rome.
    • Handle: RePEc:sap:wpaper:wp65
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    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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