Vertical Integration as a Source of Hold-up

Marie-Laure Allain, Claire Chambolle and Patrick Rey
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Claire Chambolle: ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique

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Abstract: While vertical integration is traditionally seen as a solution to the holdup problem, this article highlights instead that it can generate holdup problems-for rivals. We consider a successive duopoly where downstream firms invest and then secure support from an upstream supplier. We first show that vertical integration generates ex ante incentives to create holdup problems: an integrated supplier is willing to pre-commit itself to appropriating or dissipating part of its customer's profits, to expose the independent rival to being held-up by the other supplier, and discourage in this way the rival's investment. We then show that, even in the absence of any pre-commitment, vertical integration also creates holdup problems ex post when degrading the quality of the support provided to one downstream firm benefits its rival. We also provide illustrations in terms of standard industrial organization models and of antitrust cases, and discuss the robustness of the insights.

Keywords: Incomplete contracts; Hold-up; Vertical Integration; Vertical foreclosure (search for similar items in EconPapers)
Date: 2016
Note: View the original document on HAL open archive server: https://hal.science/hal-03523213v1
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Citations: View citations in EconPapers (27)

Published in Review of Economic Studies, 2016, 83 (1), pp.1 - 25. ⟨10.1093/restud/rdv035⟩

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Related works:
Journal Article: Vertical Integration as a Source of Hold-up (2016)
Working Paper: Vertical Integration as a Source of Hold-up (2015)
Working Paper: Vertical Integration as a Source of Hold-up (2014)
Working Paper: Vertical Integration as a Source of Hold-up (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03523213

DOI: 10.1093/restud/rdv035

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