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Asymmetric Vertical Integration

Author

Listed:
  • Stefan Buehler

    (Socioeconomic Institute, University of Zurich)

  • Armin Schmutzler

    (Socioeconomic Institute, University of Zurich)

Abstract

We examine vertical backward integration in a reducedform model of successive oligopolies. Our key findings are: (i) There may be asymmetric equilibria where some firms integrate and others remain separated, even if firms are symmetric initially; (ii) Efficient firms are more likely to integrate vertically. As a result, integrated firms also tend to have a large market share. The driving force behind these findings are demand/mark-up complementarities in the product market. We also identify countervailing forces resulting from strong vertical foreclosure, upstream sales and endogenous acquisition costs.

Suggested Citation

  • Stefan Buehler & Armin Schmutzler, 2003. "Asymmetric Vertical Integration," SOI - Working Papers 0306, Socioeconomic Institute - University of Zurich, revised Nov 2004.
    • Handle: RePEc:soz:wpaper:0306
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    References listed on IDEAS

    as
    1. Buehler, Stefan & Schmutzler, Armin & Benz, Men-Andri, 2004. "Infrastructure quality in deregulated industries: is there an underinvestment problem?," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 253-267, February.
    2. Gärtner, Dennis L. & Halbheer, Daniel, 2009. "Are there waves in merger activity after all?," International Journal of Industrial Organization, Elsevier, vol. 27(6), pages 708-718, November.
    3. Daniel Halbheer & Sarah Niggli & Armin Schmutzler, 2006. "What Does it Take to Sell Environmental Policy? An Empirical Analysis of Referendum Data," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 33(4), pages 441-462, April.
    4. Andreas Polk, 2002. "Multilateral Agreement On Investments (MAI) - A Critical Assessment From an Industrial Economics Point of View," SOI - Working Papers 0201, Socioeconomic Institute - University of Zurich, revised Feb 2002.
    5. Schmutzler, Armin & Bühler, Stefan & Borek, Thomas, 2003. "Weddings with Uncertain Prospects - Mergers under Asymmetric Information," CEPR Discussion Papers 3839, C.E.P.R. Discussion Papers.
    6. Yves Schneider & Peter Zweifel, 2004. "How Much Internalization of Nuclear Risk Through Liability Insurance?," Journal of Risk and Uncertainty, Springer, vol. 29(3), pages 219-240, December.
    7. Thomas Borek & Stefan Buehler & Armin Schmutzler, 2004. "Mergers under Asymmetric Information � Is there a Lemons Problem?," SOI - Working Papers 0408, Socioeconomic Institute - University of Zurich.
    8. Rainer Winkelmann, 2002. "Subjektive Daten in der empirischen Wirtschaftsforschung: Probleme und Perspektiven," SOI - Working Papers 0207, Socioeconomic Institute - University of Zurich, revised Jul 2002.
    9. Schmutzler, Armin & Bühler, Stefan, 2003. "Who Integrates?," CEPR Discussion Papers 4066, C.E.P.R. Discussion Papers.
    10. Thomas Borek & Stefan Buehler & Armin Schmutzler, 2002. "Weddings with Uncertain Prospects � Mergers under Asymmetric Information," SOI - Working Papers 0213, Socioeconomic Institute - University of Zurich, revised Feb 2004.
    11. Mahler, Philippe & Winkelmann, Rainer, 2004. "Single Motherhood and (Un)Equal Educational Opportunities: Evidence for Germany," IZA Discussion Papers 1391, Institute of Labor Economics (IZA).
    12. Zava Aydemir & Stefan Buehler, 2002. "Estimating Vertical Foreclosure in U.S. Gasoline Supply," SOI - Working Papers 0212, Socioeconomic Institute - University of Zurich.
    13. Slade, Margaret E, 1998. "Strategic Motives for Vertical Separation: Evidence from Retail Gasoline Markets," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 14(1), pages 84-113, April.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Buehler, Stefan & Burghardt, Dirk, 2013. "Globalization and Vertical Structure: An Empirical Investigation," Economics Working Paper Series 1310, University of St. Gallen, School of Economics and Political Science.
    2. Zanaj Skerdilajda, 2010. "Successive Oligopolies and Decreasing Returns," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-26, November.
    3. Buehler, Stefan & Boom, Anette, 2014. "Restructuring the Electricity Industry: Vertical Structure and the Risk of Rent Extraction," Economics Working Paper Series 1437, University of St. Gallen, School of Economics and Political Science.
    4. 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.
    5. G. Rossini, 2005. "Pitfalls in private and social incentives of vertical crossborder outsourcing," Working Papers 536, Dipartimento Scienze Economiche, Universita' di Bologna.
    6. Matsushima Noriaki & Mizuno Tomomichi, 2012. "Equilibrium Vertical Integration with Complementary Input Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-32, June.
    7. Rossini, Gianpaolo, 2005. "Outsourcing with labor management," Economic Systems, Elsevier, vol. 29(4), pages 455-466, December.
    8. Chen Yutian & Sen Debapriya, 2012. "Outsourcing and Downstream R&D under Economies of Scale," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-33, September.
    9. Thomas, Charles J., 2011. "Vertical mergers in procurement markets," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 200-209, March.
    10. Leahy Dermot & Montagna Catia, 2017. "Economising, Strategising and the Vertical Boundaries of the firm," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 17(1), pages 1-35, January.
    11. Friedel Bolle & Yves Breitmoser, 2011. "Transaction Costs and Capacity Costs as Interrelated Determinants of Vertical Integration in Oligopolies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(2), pages 266-290, June.
    12. Tomomichi Mizuno, 2012. "Direct Marketing in Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 373-397, June.
    13. Thomas Borek & Stefan Bühler & Armin Schmutzler, 2008. "Analyzing Mergers under Asymmetric Information: A Simple Reduced-Form Approach," University of St. Gallen Department of Economics working paper series 2008 2008-15, Department of Economics, University of St. Gallen.
    14. Schmutzler, Armin, 2010. "The relation between competition and innovation -- Why is it such a mess?," CEPR Discussion Papers 7640, C.E.P.R. Discussion Papers.
    15. Noriaki Matsushima & Tomomichi Mizuno, 2007. "Why do large firms tend to integrate vertically? - asymmetric vertical integration reconsidered -," Discussion Papers 2007-34, Kobe University, Graduate School of Business Administration.
    16. Yu-Chieh Chang & Shu-Yi Liao, 2019. "The economic analysis of product substitutability and intimidation effect on vertical integration," Journal of Administrative and Business Studies, Professor Dr. Usman Raja, vol. 5(4), pages 206-218.

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    More about this item

    Keywords

    successive oligopolies; vertical integration; effciency; foreclosure;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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