Vertical Integration, Raising Rivals’ Costs and Upstream Collusion

Hans-Theo Normann

No 2008_30, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: This paper analyzes the impact vertical integration has on upstream collusion when the price of the input is linear. As a first step, the paper derives the collusive equilibrium that requires the lowest discount factor in the infinitely repeated game when one firm is vertically integrated. It turns out this is the joint-profit maximum of the colluding firms. The discount factor needed to sustain this equilibrium is then shown to be unambiguously lower than the one needed for collusion in the separated industry. While the previous literature has found it difficult to reconcile raising-rivals-costs strategies following a vertical merger with equilibrium behavior in the static game, they are subgame perfect in the repeated game studied here.

Keywords: collusion; foreclosure; raising rivals’ costs; vertical integration (search for similar items in EconPapers)
JEL-codes: D43 L13 L23 L40 (search for similar items in EconPapers)
Date: 2008-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Vertical integration, raising rivals' costs and upstream collusion (2009)
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