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

Heavner, D. Lee, Vertical Enclosure: Vertical Integration and the Reluctance to Purchase from a Competitor (December 1999). Available at SSRN: https://ssrn.com/abstract=201888 or http://dx.doi.org/10.2139/ssrn.201888

D. Lee Heavner (Contact Author)

Analysis Group, Inc. ( email )

333 South Hope Street
27th Floor
Los Angeles, CA
United States

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