Asymmetric Vertical Integration
Advances in Theoretical Economics, Vol. 5, No. 1, Article 1, 2005
Posted: 10 Jan 2005
We examine vertical backward integration in a reduced-form model of successive oligopolies. Our key findings are: (i) There may be asymmetric equilibria where some firms integrate and others remain separated, even if firms are symmetric initially; (ii) Efficient firms are more likely to integrate vertically. As a result, integrated firms also tend to have a large market share. The driving force behind these findings are demand/mark-up complementarities in the product market. We also identify countervailing forces resulting from strong vertical foreclosure, upstream sales and endogenous acquisition costs.
Keywords: Successive oligopolies, vertical integration, efficiency
JEL Classification: L13, L22, L40, L82
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