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Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices

Ali Hortacsu and Chad Syverson

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: This paper looks at the reasons for and results of vertical integration, with specific regard to its possible effects on market power as proposed in the theoretical literature on foreclosure. It uses a rich data set on producers in the cement and ready-mixed concrete industries over a 34- year period to perform a detailed case study. There is little evidence that foreclosure effects are quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. We suggest an alternative mechanism that is consistent with these patterns and provide additional evidence in support of it: namely, that higher productivity producers are more likely to vertically integrate, and as has been documented elsewhere, are also larger, more likely to grow and survive, and charge lower prices. We explore possible sources of vertically integrated producers’ productivity advantage and find that the advantage is tied to firm size, possibly in part through improved logistics coordination, but not to several other possible explanations.

New Economics Papers: this item is included in nep-com and nep-eff
Date: 2006-07
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https://www2.census.gov/ces/wp/2006/CES-WP-06-21.pdf First version, 2006 (application/pdf)

Related works:
Working Paper: Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices (2008) Downloads
Journal Article: Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices (2007) Downloads
Working Paper: Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices (2007) Downloads
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