ON THE COMPETITIVE EFFECTS OF VERTICAL INTEGRATION UNDER PRODUCT DIFFERENTIATION

Ramón Faulí-Oller () and Joel Sandonís Díez ()
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Ramón Faulí-Oller: Universidad de Alicante
Joel Sandonís Díez: Universidad de Alicante

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: 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 downstream and (3) observable (two-part tariff) contracts. The result does not hold however, whenever any of the three assumptions is relaxed. Rey and Tirole (1999) show that, with secret contracts, vertical integration is profitable and anticompetitive. The present paper shows that, adding an alternative supplier and product differentiation to the benchmark model, the effects of vertical integration depend on the efficiency level of the alternative supplier. When the alternative supply is relatively efficient, we also obtain that vertical integration is profitable and anticompetitive. However, when the alternative supplier is relatively inefficient, vertical integration becomes unprofitable and increases social welfare.

Keywords: Vertical integration; market foreclosure; two-part tariff contracts. (search for similar items in EconPapers)
JEL-codes: D4 K21 L22 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2003-09
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