Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices

61 Pages Posted: 17 Feb 2007 Last revised: 27 Mar 2022

See all articles by Ali Hortacsu

Ali Hortacsu

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Chad Syverson

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2007

Abstract

This paper empirically investigates the possible market power effects of vertical integration proposed in the theoretical literature on vertical foreclosure. It uses a rich data set of cement and ready-mixed concrete plants that spans several decades to perform a detailed case study. There is little evidence that foreclosure is quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. These patterns are consistent, however, with an alternative efficiency-based mechanism. Namely, higher productivity producers are more likely to vertically integrate and are also larger, more likely to survive, and charge lower prices. We find evidence that integrated producers' productivity advantage is tied to improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not due to firms' vertical structures per se: non-vertical firms with large local concrete operations have similarly high productivity levels.

Suggested Citation

Hortacsu, Ali and Syverson, Chad, Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices (February 2007). NBER Working Paper No. w12894, Available at SSRN: https://ssrn.com/abstract=963728

Ali Hortacsu (Contact Author)

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Chad Syverson

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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