Market Structure and the Competitive Effects of Vertical Integration

Posted by Social Science Research Network

Market Structure and the Competitive Effects of Vertical Integration – Simon Loertscher (University of Melbourne – Department of Economics) and Markus Reisinger (WHU – Otto Beisheim School of Management ; CESifo (Center for Economic Studies and Ifo Institute))

ABSTRACT: We analyze the competitive effects of backward vertical integration when firms exert market power upstream and compete à la Cournot downstream. Contrasting with previous literature, a small degree of vertical integration is always procompetitive because efficiency gains dominate foreclosure effects, and vertical integration even to full foreclosure can be procompetitive. Surprisingly, vertical integration is more likely to be procompetitive if the industry is otherwise more concentrated. Extensions analyze incentives to integrate and differentiated Bertrand competition downstream. Our analysis suggests that antitrust authorities should be wary of vertical integration when the integrating firm faces many competitors and should be permissive otherwise.