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Vertical Integration and Foreclosure: Evidence from Production Network Data

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  • Johannes Boehm

    (Département d'économie)

  • Jan Sonntag

    (Département d'économie)

Abstract

This paper studies the prevalence of vertical market foreclosure using a novel dataset on U.S. and international buyer-seller relationships, and across a large range of industries. We find that relationships are more likely to break when suppliers vertically integrate with one of the buyers’ competitors than when they vertically integrate with an unrelated firm. This relationship holds also, among other things, when conditioning on mergers that follow exogenous downward pressure on the supplier’s stock prices, suggesting that reverse causality is unlikely to explain the result. In contrast, the relationship vanishes when using rumored or announced but not completed integration events. Firms experience a substantial drop in sales when one of their suppliers integrates with one of their competitors. This sales drop is mitigated if the firm has alternative suppliers in place.

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  • Johannes Boehm & Jan Sonntag, 2018. "Vertical Integration and Foreclosure: Evidence from Production Network Data," Sciences Po Economics Discussion Papers 2018-12, Sciences Po Departement of Economics.
  • Handle: RePEc:spo:wpecon:info:hdl:2441/44gofgf80399mp5fq5q50vv5t6
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    1. Christopher Ksoll & Rocco Macchiavello & Ameet Morjaria, 2021. "Electoral Violence and Supply Chain Disruptions in Kenya's Floriculture Industry," NBER Working Papers 29297, National Bureau of Economic Research, Inc.
    2. Sertsios, Giorgo, 2020. "Corporate finance, industrial organization, and organizational economics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    3. Margaret E. Slade, 2021. "Vertical Mergers: A Survey of Ex Post Evidence and Ex Ante Evaluation Methods," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(4), pages 493-511, June.
    4. Francine Lafontaine & Margaret E. Slade, 2021. "Presumptions in Vertical Mergers: The Role of Evidence," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 59(2), pages 255-272, September.

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    More about this item

    Keywords

    Mergers and acquisitions; Market foreclosure; Vertical integration; Production networks;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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