Vertical integration, market foreclosure and quality investment

Roberto Hernan Gonzalez
Authors registered in the RePEc Author Service: Praveen Kujal

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: Incentives to vertically integrate are studied in an industry where downstream firms are vertically differentiated. Vertical integration by one of the firms increases production costs for the rival. Increased production costs impact quality investment both by the integrated firm and the unintegrated rival. A firm, integrating first, always produces the high quality good and earns higher profits. Quality investment by both firms decreases under any (vertical integration) scenario and competition among downstream firms is softened. A fully integrated industry, with increased product differentiation, is observed in equilibrium. Due to increase in firm profits, social welfare under this structure is greater than under no integration.

Date: 2006-02
New Economics Papers: this item is included in nep-com and nep-mic
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Journal Article: Vertical integration, market foreclosure and quality investment (2012)
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