Backwards Integration and Strategic Delegation
Centre for European Economic Research (ZEW)
ESMT European School of Management and Technology; Centre for Economic Policy Research (CEPR); WZB Berlin Social Science Center - Competitiveness and Industrial Change
Konrad O. Stahl
University of Mannheim - Department of Economics; Centre for Economic Policy Research (CEPR)
March 22, 2012
ZEW - Centre for European Economic Research Discussion Paper No. 12-022
We analyze the effects of downstream firms’ acquisition of pure cash flow rights in an efficient upstream supplier when all firms compete in prices. With an acquisition, downstream firms internalize the effects of their actions on their rivals’ sales. Double marginalization is enhanced. Whereas full vertical integration would lead to decreasing, passive backwards ownership leads to increasing downstream prices and is more profitable, as long as competition is sufficiently intensive. Downstream acquirers strategically abstain from vertical control, inducing the efficient supplier to commit to high prices. All results are sustained when upstream suppliers are allowed to charge two part tariffs.
Number of Pages in PDF File: 27
Keywords: double marginalization, strategic delegation, vertical integration, partial ownership, common agency
JEL Classification: L22, L40
Date posted: March 23, 2012
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