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

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
205
Abstract Views
2,653
Rank
268,682
PlumX Metrics