Vertical Integration with Complementary Inputs
49 Pages Posted: 1 Jul 2013
Date Written: March 20, 2013
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
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