Intimidating Competitors ? Endogenous Vertical Integration and Downstream Investment in Successive Oligopoly
International Journal of Industrial Organization 26(1), 2008, 247-265
28 Pages Posted: 6 Dec 2004 Last revised: 25 Mar 2020
Date Written: February 11, 2004
We examine the interplay of endogenous vertical integration and cost-reducing downstream investment in successive oligopoly. We start from a linear Cournot model to motivate our more general reduced-form framework. For this general framework, we establish the following main results: First, vertical integration increases own investment and decreases competitor investment (intimidation effect). Second, asymmetric equilibria typically involve integrated firms that invest more into efficiency than their separated counterparts. Our findings suggest that asymmetric vertical integration is a potential explanation for the initial difference between leader and laggard in investment games.
Keywords: vertically related oligopolies, investments, vertical integration, cost reduction
JEL Classification: L13, L20, L22
Suggested Citation: Suggested Citation