Can Vertical Integration by a Monopsonist Harm Consumer Welfare?

Melbourne Business School Working Paper No. 2003-03

30 Pages Posted: 25 Apr 2003

See all articles by Catherine de Fontenay

Catherine de Fontenay

University of Melbourne - Melbourne Business School

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Date Written: March 11, 2003

Abstract

Vertical integration by a monopsonist is generally believed not to harm consumers. This paper demonstrates, in a natural economic setting, that this conventional wisdom may not hold. We model bargaining between a monopsonist and independent suppliers when it is difficult to write binding long-term supply price contracts. Thus, a vertically separated monopolist is vulnerable to hold-up. Without integration, we demonstrate that a bottleneck monopsonist has an incentive to encourage more firms in a related segment than would arise in a pure neoclassical monopoly. Having more firms mitigates the hold-up power of any one. This, however, distorts the cost structure of the industry toward greater industry output and, hence, lowers final good prices. Vertical integration mitigates the hold-up problem faced by the monopsonist. It allows it to generate and appropriate a greater level of industry profits; largely at the expense of consumers. It is shown that horizontal competition reduces the anti-competitive incentives and harm from integration.

JEL Classification: L42

Suggested Citation

de Fontenay, Catherine C. and Gans, Joshua S., Can Vertical Integration by a Monopsonist Harm Consumer Welfare? (March 11, 2003). Melbourne Business School Working Paper No. 2003-03. Available at SSRN: https://ssrn.com/abstract=386700 or http://dx.doi.org/10.2139/ssrn.386700

Catherine C. De Fontenay

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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