Downstream Concentration and Producer's Capacity Choice

Joao V. Montez

Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) from Université de Lausanne, Faculté des HEC, DEEP

Abstract: This paper studies how buyers' integration affects the capacity choice of a producer. Contrary to "conventional wisdom", we show that, under natural assumptions, integration may lead to a higher equilibrium supply level. Our result hinges on the following trade-off: for any given level of capacity, the share of the total surplus accruing to the producer is lower when concentration is high, i.e. the hold-up is more severe. Yet, this share decreases when capacity increases. This reduces the incentives to increase capacity. The rate at which this occurs is higher when concentration is low. The second effect counteracts, and may dominate, the first. When the cost of capacity is low the equilibrium supply level is always higher when downstream concentration is high.

Keywords: buyer integration; capacity choice; hold-up (search for similar items in EconPapers)
JEL-codes: L10 L40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec
Date: 2004-08
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