On Vertical Mergers and Their Competitive Effects

Yongmin Chen

No 383, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: It is well known that vertical integration can change an upstream producer's incentive to supply the integrated firm's downstream rivals. However, it has not been noticed that vertical integration also changes these rivals' incentive to choose suppliers. Once this is recognized, some important results in the literature are shown to be incorrect. An equilibrium theory of vertical merger is then developed. Under fairly general conditions, vertical mergers will result in both efficiency gains and market foreclosure (collusion), and a familiar measure concerning product differentiation can be used to evaluate whether a vertical merger tends to benefit or harm consumers.

Date: 2000-08-01
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