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Intimidating Competitors – Endogenous Vertical Integration and Downstream Investment in Successive Oligopoly

  • Stefan Buehler

    ()

    (Socioeconomic Institute, University of Zurich)

  • Armin Schmutzler

    ()

    (Socioeconomic Institute, University of Zurich)

We examine the interplay of endogenous vertical integration and costreducing downstream investment in successive oligopoly. We start from a linear Cournot model to motivate our more general reducedform framework. For this general framework, we establish the following main results: First, vertical integration increases own investment and decreases competitor investment (intimidation effect). Second, asymmetric equilibria typically involve integrated firms that invest more into effciency than their separated counterparts. Our findings suggest that asymmetric vertical integration is a potential explanation for the initial difference between leader and laggard in investment games.

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File URL: http://www.soi.uzh.ch/research/wp/2004/wp0409.pdf
File Function: Revised version, 2005
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Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0409.

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Length: 28 pages
Date of creation: Jul 2004
Date of revision: Jul 2005
Publication status: Published in International Journal of Industrial Organization, 2008, 26(1), 247-265
Handle: RePEc:soz:wpaper:0409
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  1. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Cabral, Luis M B & Riordan, Michael H, 1994. "The Learning Curve, Market Dominance, and Predatory Pricing," Econometrica, Econometric Society, vol. 62(5), pages 1115-40, September.
  3. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
  4. Elberfeld, Walter, 2002. "Market Size and Vertical Integration: Stigler's Hypothesis Reconsidered," Journal of Industrial Economics, Wiley Blackwell, vol. 50(1), pages 23-42, March.
  5. Waterman, David & Weiss, Andrew A., 1996. "The effects of vertical integration between cable television systems and pay cable networks," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 357-395.
  6. Jansen, Jos, 2003. "Coexistence of strategic vertical separation and integration," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 699-716, May.
  7. Woodruff, Christopher, 2002. "Non-contractible investments and vertical integration in the Mexican footwear industry," International Journal of Industrial Organization, Elsevier, vol. 20(8), pages 1197-1224, October.
  8. Flaherty, M Therese, 1980. "Industry Structure and Cost-Reducing Investment," Econometrica, Econometric Society, vol. 48(5), pages 1187-1209, July.
  9. Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
  10. Gérard Gaudet & Ngo Van Long, 1993. "Vertical Integration, Foreclosure and Profits in the Presence of Double Marginalisation," Cahiers de recherche du Département des sciences économiques, UQAM 9308, Université du Québec à Montréal, Département des sciences économiques.
  11. Yongmin Chen, 2000. "On Vertical Mergers and Their Competitive Effects," Econometric Society World Congress 2000 Contributed Papers 0383, Econometric Society.
  12. Slade, Margaret E, 1998. "Beer and the Tie: Did Divestiture of Brewer-Owned Public Houses Lead to Higher Beer Prices?," Economic Journal, Royal Economic Society, vol. 108(448), pages 565-602, May.
  13. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  14. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
  15. 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.
  16. Slade, Margaret E, 1998. "Strategic Motives for Vertical Separation: Evidence from Retail Gasoline Markets," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(1), pages 84-113, April.
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