Vertical Integration with Complementary Inputs

49 Pages Posted: 1 Jul 2013

See all articles by Markus Reisinger

Markus Reisinger

Frankfurt School of Finance & Management - Economics Department; CESifo (Center for Economic Studies and Ifo Institute)

Emanuele Tarantino

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Date Written: March 20, 2013

Abstract

We analyze the welfare consequences and the profitability of vertical integration when downstream firms deal with complementary input suppliers holding market power. We find that although single integration is anticompetitive, pairwise integration is often procompetitive and involves below cost pricing at the wholesale level. Moreover, we show that vertical integration is not necessarily profitable, since a complementary input provider extracts part of the greater profits earned by the integrated chain. Contrary to previous literature, this effect is particularly strong if the integrated firm is highly efficient. Finally, we analyze the role of information sharing within an integrated organization.

Keywords: K21, L13, L24, L42

JEL Classification: Vertical Relations, Vertical Integration, Foreclosure, Complementary Inputs, Secret Offers, Pairwise

Suggested Citation

Reisinger, Markus and Tarantino, Emanuele, Vertical Integration with Complementary Inputs (March 20, 2013). TILEC Discussion Paper No. 2011-004, Available at SSRN: https://ssrn.com/abstract=1743483 or http://dx.doi.org/10.2139/ssrn.1743483

Markus Reisinger (Contact Author)

Frankfurt School of Finance & Management - Economics Department ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Emanuele Tarantino

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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