Backwards Integration and Strategic Delegation

27 Pages Posted: 23 Mar 2012  

Matthias Hunold

Düsseldorf Institute for Competition Economics (DICE)

Lars-Hendrik Röller

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)

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Date Written: March 22, 2012

Abstract

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.

Keywords: double marginalization, strategic delegation, vertical integration, partial ownership, common agency

JEL Classification: L22, L40

Suggested Citation

Hunold, Matthias and Röller, Lars-Hendrik and Stahl, Konrad O., Backwards Integration and Strategic Delegation (March 22, 2012). ZEW - Centre for European Economic Research Discussion Paper No. 12-022. Available at SSRN: https://ssrn.com/abstract=2026987 or http://dx.doi.org/10.2139/ssrn.2026987

Matthias Hunold (Contact Author)

Düsseldorf Institute for Competition Economics (DICE) ( email )

Universitätsstr. 1
Düsseldorf, 40225
Germany

Lars-Hendrik Röller

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin, 10178
Germany

HOME PAGE: http://www.esmt.org/eng/faculty-research/lars-hendrik-roeller/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

WZB Berlin Social Science Center - Competitiveness and Industrial Change ( email )

Reichpietschufer 50
10785 Berlin
Germany
+49 30 2549 1440 (Phone)
+49 30 2549 1442 (Fax)

Konrad O. Stahl

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany
+49 621 181 1875 (Phone)
+49 621 181 1874 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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