Abstract

http://ssrn.com/abstract=1275303
 
 

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Vertical Integration, Raising Rivals' Costs and Upstream Collusion


Hans-Theo Normann


Heinrich Heine Universität Dusseldorf - Department of Economics; Max Planck Institute for Research on Collective Goods

August 2008

MPI Collective Goods Preprint, No. 2008/30

Abstract:     
This paper analyzes the impact vertical integration has on upstream collusion when the price of the input is linear. As a first step, the paper derives the collusive equilibrium that requires the lowest discount factor in the infinitely repeated game when one firm is vertically integrated. It turns out this is the joint-profit maximum of the colluding firms. The discount factor needed to sustain this equilibrium is then shown to be unambiguously lower than the one needed for collusion in the separated industry. While the previous literature has found it difficult to reconcile raising-rivals-costs strategies following a vertical merger with equilibrium behavior in the static game, they are subgame perfect in the repeated game studied here.

Number of Pages in PDF File: 43

Keywords: collusion, foreclosure, raising rivals' costs, vertical integration

JEL Classification: D43, L13, L23, L40

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Date posted: September 29, 2008  

Suggested Citation

Normann, Hans-Theo, Vertical Integration, Raising Rivals' Costs and Upstream Collusion (August 2008). MPI Collective Goods Preprint, No. 2008/30. Available at SSRN: http://ssrn.com/abstract=1275303 or http://dx.doi.org/10.2139/ssrn.1275303

Contact Information

Hans-Theo Normann (Contact Author)
Heinrich Heine Universität Dusseldorf - Department of Economics ( email )
Duesseldorf
Germany
Max Planck Institute for Research on Collective Goods ( email )
Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

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