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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 empirically investigates the possible market power effects of vertical integration proposed in the theoretical literature on vertical foreclosure. It uses a rich data set of cement and ready-mixed concrete plants that spans several decades to perform a detailed case study. There is little evidence that foreclosure is quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. These patterns are consistent, however, with an alternative efficiency-based mechanism. Namely, higher productivity producers are more likely to vertically integrate and are also larger, more likely to survive, and charge lower prices. We find evidence that integrated producers’ productivity advantage is tied to improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not due to firms’ vertical structures per se: non-vertical firms with large local concrete operations have similarly high productivity levels.

Pages: 61 pages
Date: 2008-12
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https://www2.census.gov/ces/wp/2008/CES-WP-08-41.pdf First version, 2008 (application/pdf)

Related works:
Journal Article: Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices (2007) Downloads
Working Paper: Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices (2007) Downloads
Working Paper: Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices (2006) Downloads
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