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Vertical Integration with Complementary Inputs

49 Pages Posted: 1 Jul 2013  

Markus Reisinger

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

Emanuele Tarantino

University of Mannheim - Department of Economics; Tilburg Law and Economics Center (TILEC)

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 )

Sonnemannstra├če 9-11
Frankfurt am Main, 60314
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Emanuele Tarantino

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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