Vertical Enclosure: Vertical Integration and the Reluctance to Purchase from a Competitor
29 Pages Posted: 14 Jan 2000
Date Written: December 1999
Abstract
Vertical integration affects a supplier's ability to sell to competing downstream units. If downstream units must commit to a supplier prior to contracting on the final terms of trade, then suppliers have ex-post monopoly power over their customers. This monopoly power increases a supplier's ability to influence competition between its customers. Vertical integration leads a supplier to favor its own downstream unit. Such favoritism reduces a downstream unit's gain from trading with a vertically integrated competitor. This effect can be powerful enough to make downstream firms refuse to purchase from a vertically integrated competitor. The opportunity cost of this forgone trade can be sufficient to lead firms to forgo mergers predicted by bilateral models of vertical integration.
JEL Classification: D23, L22, G34
Suggested Citation: Suggested Citation