When Backward Integration by a Dominant Firm Improves Welfare

Laurent Linnemer

No 740, CESifo Working Paper Series from CESifo

Abstract: This paper studies the welfare consequences of a vertical merger that raises rivals‘ costs when downstream competition is à la Cournot between firms with constant asymmetric marginal costs. The main result is that such a vertical merger can nevertheless improve welfare if it involves a downstream firm whose cost is “low enough“. This is because by raising the input price paid by the non-merging firms the merger thereby shifts production away from those relatively inefficient producers in favor of the more efficient firm. However there is a tradeoff between the gain in productive efficiency and the loss in consumers‘ surplus caused by a higher downstream price which follows a higher input price. It is also shown, through an example, that this result extends to price competition with differentiated products.

Keywords: foreclosure; raising rival costs; Cournot; welfare; asymmetric costs (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (1)

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Working Paper: When Backward Integration by a Dominant Firm Improves Welfare (2000)
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