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Market Structure and the Competitive Effects of Vertical Integration

62 Pages Posted: 1 Feb 2014  

Simon Loertscher

University of Melbourne - Department of Economics

Markus Reisinger

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

Date Written: January 30, 2014

Abstract

We analyze the competitive effects of backward vertical integration when firms exert market power upstream and compete à la Cournot downstream. Contrasting with previous literature, a small degree of vertical integration is always procompetitive because efficiency gains dominate foreclosure effects, and vertical integration even to full foreclosure can be procompetitive. Surprisingly, vertical integration is more likely to be procompetitive if the industry is otherwise more concentrated. Extensions analyze incentives to integrate and differentiated Bertrand competition downstream. Our analysis suggests that antitrust authorities should be wary of vertical integration when the integrating firm faces many competitors and should be permissive otherwise.

Keywords: Vertical Integration, Market Structure, Downstream Oligopsony, Competition Policy

JEL Classification: D43, L41, L42

Suggested Citation

Loertscher, Simon and Reisinger, Markus, Market Structure and the Competitive Effects of Vertical Integration (January 30, 2014). Available at SSRN: https://ssrn.com/abstract=2388260 or http://dx.doi.org/10.2139/ssrn.2388260

Simon Loertscher

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

Markus Reisinger (Contact Author)

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

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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