The strategic value of partial vertical integration

Raffaele Fiocco

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We investigate the incentive for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when the retailers are privately informed about their production costs and engage in differentiated good price competition. Partial vertical integration entails an “information vertical effect†: the partial misalignment of pro.t objectives within a partially integrated manufacturer-retailer hierarchy involves costs from asymmetric information that reduce the hierarchy’s profitability. This translates into an opposite “competition horizontal effect†: the partially integrated hierarchy commits to a higher retail price than under full integration, which strategically relaxes competition. The equilibrium degree of vertical integration trades o¤ the benefits of softer competition against the informational costs.

Keywords: asymmetric information; partial vertical integration; product differentiation; vertical mergers; vertical restraints (search for similar items in EconPapers)
JEL-codes: D82 L13 L42 (search for similar items in EconPapers)
Date: 2014-03-09
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: The strategic value of partial vertical integration (2016)
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