On Vertical Mergers and Their Competitive Effects

  title={On Vertical Mergers and Their Competitive Effects},
  author={Yongmin Chen},
  journal={The RAND Journal of Economics},
  • Yongmin Chen
  • Published 24 January 2001
  • Economics
  • The RAND Journal of Economics
It is well known that vertical integration cats change the pricing incentive of an upstream producer. However, it has not been noticed that vertical integration may also change the pricing incentive of downstream producer and the incentive of a competitor in choosing input suppliers. I develop an equilibrium theory of vertical merger that incorporates these additional strategic considerations. Under fairly general conditions, a vertical merger will result in both efficiency gains and a… 

Figures from this paper

Bargaining, vertical mergers and entry

This paper analyzes vertical integration incentives in a bilaterally duopolistic industry where upstream producers bargain with downstream retailers on terms of supply. In the applied framework

Upstream horizontal mergers and vertical integration

We study upstream horizontal mergers when one of the merging parties is a vertically integrated firm. Under upstream cost symmetry and observable contracting, we demonstrate that such type of


The result of neutrality of vertical integration for competition postulated by the Chicago School can be supported by a benchmark model with (1) an upstream monopolist, (2) homogeneous goods

Vertical Disintegration

With economies of scale, a vertically integrated firm can lower its upstream cost by supplying downstream competitors. The competitors may strategically choose not to purchase from the integrated

Backwards Integration and Strategic Delegation

We analyze the effects of downstream firms' acquisition of pure cash flow rights in an efficient upstream supplier when all firms compete in prices. With an acquisition, downstream firms internalize

Vertical Integration with Complementary Inputs

We analyze the welfare consequences and the profitability of vertical integration when downstream firms deal with complementary input suppliers holding market power. We find that although single

Upstream Competition between Vertically Integrated Firms

We propose a model of two-tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous

Does Vertical Integration Promote Downstream Incomplete Collusion? An Evaluation of Static and Dynamic Stability

This paper analyzes the impact of vertical integration on the static and dynamic stability of downstream incomplete collusion. It is shown that a vertical merger between an upstream firm and a

How Do Market Structures Affect Decisions on Vertical Integration/Separation?

We provide a simple model to investigate decisions on vertical integration/separation. The key feature of this model is that more than one input is required for the final products of the local

Vertical Integration in the Presence of Upstream Competition

We analyze vertical integration to compare outcomes under upstream competition and monopoly. This is done in a model based on the property rights approach to firm boundaries and where multilateral



Anticompetitive Vertical Integration by a Dominant Firm

Backward vertical integration by a dominant firm into an upstream competitive industry causes both input and output prices to rise. The dominant firm's advantage may or may not offset the negative

Horizontal Mergers: An Equilibrium Analysis

The authors analyze horizontal mergers in Cournot oligopoly. They find general conditions under which such mergers raise price, and show that any merger not creating synergies raises price. The

Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium

The consequences of a horizontal merger are typically studied by treating the merger as an exogenous change in market structure that displaces the initial Cournot equilibrium. In the new equilibrium

Vertical Mergers and Market Foreclosure

yThe model in this paper illustrates three effects of vertical mergers when both stages are oligopolistic and vertically integrated and unintegrated producers coexist. First, the merging firm

Incentives to Form Coalitions with Bertrand Competition

In this article we investigate the incentive to merge when firms that produce differentiated products engage in price competition. We demonstrate that mergers of any size are beneficial and are so

Cost-Raising Strategies

This paper studies a variety of strategies by which firms could disadvantage rivals by raising their costs. In this paper, the authors show that strategies designed to raise r ivals' costs have a

Vertical integration: Determinants and effects

Vertical integration and communication

Among the many possible motives for vertical integration, the one emphasized here is uncertainty in the supply of the upstream good and the consequent need for information by downstream firms. The