Convex Costs and the Incentive for Vertical Control

John Heywood and Debashis Pal

The Economic Record, 1996, vol. 72, issue 217, 130-137

Abstract: This paper builds on the successive monopoly literature and demonstrates that fixed proportions technology downstream and inelastic final demand are not sufficient to eliminate the incentive for vertical control. As long as downstream marginal costs increase, the incentive remains. Moreover, if the downstream firm can influence the convexity of costs, a social as well as a private incentive for such control exists. This results from the ability of a downstream monopolist to increase its profit on infra‐marginal units by choosing a wasteful technology, a technology which the integrated firm avoids.

Date: 1996
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https://doi.org/10.1111/j.1475-4932.1996.tb00947.x

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