Vertical Integration and Foreclosure: Evidence from Production Network Data

61 Pages Posted: 2 Dec 2020

Date Written: November 2020

Abstract

This paper studies the prevalence of potential anticompetitive effects of vertical mergers using a novel dataset on U.S. and international buyer-seller relationships, and across a large range of industries. We find that relationships are more likely to break when suppliers vertically integrate with one of the buyers' competitors than when they vertically integrate with an unrelated firm. This relationship holds for both domestic and cross-border mergers, and for domestic and international relationships. It also holds when instrumenting mergers using exogenous downward pressure on the supplier's stock prices, suggesting that reverse causality is unlikely to explain the result. In contrast, the relationship vanishes when using rumored or announced but not completed integration events. Firms experience a substantial drop in sales when one of their suppliers integrates with one of their competitors. This sales drop is mitigated if the firm has alternative suppliers in place. These findings are consistent with anticompetitive effects of vertical mergers, such as vertical foreclosure, rising input costs for rivals, or self-foreclosure.

JEL Classification: L14, L42

Suggested Citation

Boehm, Johannes and Sonntag, Jan, Vertical Integration and Foreclosure: Evidence from Production Network Data (November 2020). CEPR Discussion Paper No. DP15463, Available at SSRN: https://ssrn.com/abstract=3737596

Johannes Boehm (Contact Author)

Sciences Po ( email )

28 Rue des Saint-Peres
Paris, 75006
France

Jan Sonntag

Sciences Po ( email )

27 rue Saint-Guillaume
Paris Cedex 07, 75337
France

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