Extending Market Power Through Vertical Integration

Melbourne Business School Working Paper 9902

31 Pages Posted: 1 Mar 1999

See all articles by Catherine de Fontenay

Catherine de Fontenay

University of Melbourne - Melbourne Business School

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Date Written: February 23, 1999

Abstract

This paper derives a model of vertical integration when it is difficult to write binding long-term supply price contracts. Thus, a vertically separated monopolist is vulnerable to hold-up. Without integration, we demonstrate that a bottleneck monopolist has an incentive to encourage more firms in a related segment than would arise in a pure monopoly. Having more firms mitigates the hold-up power of any one. This, however, distorts the cost structure of the industry toward greater industry output and, hence, lowers final good prices. Vertical integration mitigates the hold-up problem faced by the monopolist. It allows it to generate and appropriate a greater share of monopoly profits. Horizontal competition mitigates the anti-competitive effects of integration.

JEL Classification: L42

Suggested Citation

de Fontenay, Catherine C. and Gans, Joshua S., Extending Market Power Through Vertical Integration (February 23, 1999). Melbourne Business School Working Paper 9902. Available at SSRN: https://ssrn.com/abstract=152252 or http://dx.doi.org/10.2139/ssrn.152252

Catherine C. De Fontenay

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
575
Abstract Views
2,316
rank
45,804
PlumX Metrics