An Examination of the Efficiency, Foreclosure, and Collusion Rationales for Vertical Takeovers

Abstract:     
We investigate the efficiency, foreclosure, and collusion rationales for a large sample of vertical takeovers. The efficiency rationale posits that vertical integration prevents future holdup between non-integrated suppliers and customers. In contrast, the foreclosure and collusion rationales suggest that vertical integration harms competition. To distinguish between these hypotheses, we examine the announcement period wealth effects of the merging firms, acquirer rivals, target rivals, and corporate customers. Our results suggest that firms alter their vertical boundaries in a manner that is consistent with the efficiency rationale. Our tests do not find evidence supportive of the anti-competitive rationales for vertical integration.

Number of Pages in PDF File: 56

Keywords: Vertical Integration, Vertical Mergers, Takeovers, Efficiency, Collusion, Foreclosure

JEL Classification: G34, D43, K21, L40

Accepted Paper Series