Digging Deep to Compete: Vertical Integration, Product Market Competition and Prices

Danny McGowan

Journal of Industrial Economics, 2017, vol. 65, issue 4, 683-718

Abstract: This article establishes a causal effect of product market competition on vertical integration. I exploit a hitherto unexplored natural experiment in the U.S. coal mining industry and a unique mine†level organizational data set. Following an exogenous increase in product market competition, the incidence of vertical integration fell by 33% within the treatment group relative to the counterfactual. I find novel evidence that transition to the lower degree of vertical integration is driven by competition's reducing market prices by 32% which decreased the incentive to conduct vertical mergers. I discuss several possible interpretations of these changes.

Date: 2017
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