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

See all articles by Stefan Buehler

Stefan Buehler

University of St. Gallen - SEPS: Economics and Political Sciences

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: February 11, 2004

Abstract

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

Buehler, Stefan and Schmutzler, Armin, Intimidating Competitors ? Endogenous Vertical Integration and Downstream Investment in Successive Oligopoly (February 11, 2004). International Journal of Industrial Organization 26(1), 2008, 247-265, Available at SSRN: https://ssrn.com/abstract=516283 or http://dx.doi.org/10.2139/ssrn.516283

Stefan Buehler (Contact Author)

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

FGN-HSG
Varnbuelstr. 19
CH-9000 St. Gallen
Switzerland
+41-71-224-2303 (Phone)

Armin Schmutzler

University of Zurich - Department of Economics ( email )

Z├╝rich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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