Vertical Integration and Downstream Collusion

19 Pages Posted: 6 Jul 2016

See all articles by Sara Biancini

Sara Biancini

University of Cergy-Pontoise - THEMA

David Ettinger

CNRS, National Center for Scientific Research, France - CERAS

Date Written: June 09, 2016

Abstract

We investigate the effect of a vertical merger on downstream firms’ ability to collude in a repeated game framework. We show that a vertical merger has two main effects. On the one hand, it increases the total collusive profits, increasing the stakes of collusion. On the other hand, it creates an asymmetry between the integrated firm and the unintegrated competitors. The integrated firm, accessing the input at marginal cost, faces higher profits in the deviation phase and in the non cooperative equilibrium, which potentially harms collusion. As we show, the optimal collusive profit-sharing agreement takes care of the increased incentive to deviate of the integrated firm, while optimal punishment erases the difficulty related to the asymmetries in the non cooperative state. As a result, vertical integration generally favors collusion.

Keywords: vertical integration, tacit collusion

JEL Classification: D430, L130, L400, L420

Suggested Citation

Biancini, Sara and Ettinger, David, Vertical Integration and Downstream Collusion (June 09, 2016). CESifo Working Paper Series No. 5933. Available at SSRN: https://ssrn.com/abstract=2805395

Sara Biancini (Contact Author)

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

David Ettinger

CNRS, National Center for Scientific Research, France - CERAS ( email )

28, rue des Saints-Peres
75343 Paris Cedex 07
France

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