Downstream Competition, Foreclosure, and Vertical Integration

Gilles Chemla

No 2647, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper analyses the impact of competition among downstream firms on an upstream firm's payoff and on its incentive to vertically integrate when firms on both segments negotiate optimal contracts. We argue that tougher competition decreases the downstream industry profit, but improves the upstream firm's negotiation position. In particular, the upstream firm is better off encouraging competition when the downstream firms have high bargaining power. We derive implications on the interplay between vertical integration and competition among the downstream firms. The mere possibility of vertical integration may constitute a barrier to entry and may trigger strategic horizontal spin-offs or mergers. We discuss the impact of upstream competition on our results.

Keywords: Contracts; Bargaining; Competition; Foreclosure; Vertical integration (search for similar items in EconPapers)
JEL-codes: D40 L10 L42 (search for similar items in EconPapers)
Date: 2000-12
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Citations: View citations in EconPapers (3)

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