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Convex Costs and the Incentive for Vertical Control

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  • JOHN S. HEYWOOD
  • DEBASHIS PAL

Abstract

This paper builds on the successive monopoly literature and demonstrates that fixed proportions technology downstream and inelastic final demand are not sufficient to eliminate the incentive for vertical control. As long as downstream marginal costs increase, the incentive remains. Moreover, if the downstream firm can influence the convexity of costs, a social as well as a private incentive for such control exists. This results from the ability of a downstream monopolist to increase its profit on infra‐marginal units by choosing a wasteful technology, a technology which the integrated firm avoids.

Suggested Citation

  • John S. Heywood & Debashis Pal, 1996. "Convex Costs and the Incentive for Vertical Control," The Economic Record, The Economic Society of Australia, vol. 72(217), pages 130-137, June.
    • Handle: RePEc:bla:ecorec:v:72:y:1996:i:217:p:130-137
    DOI: 10.1111/j.1475-4932.1996.tb00947.x
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    References listed on IDEAS

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    1. Schmalensee, Richard, 1973. "A Note on the Theory of Vertical Integration," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 442-449, Part I, M.
    2. Vernon, John M & Graham, Daniel A, 1971. "Profitability of Monopolization by Vertical Integration," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 924-925, July-Aug..
    3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    4. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58(4), pages 347-347.
    5. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    6. Blair, Roger D. & Kaserman, David L., 1983. "Law and Economics of Vertical Integration and Control," Elsevier Monographs, Elsevier, edition 1, number 9780121034801.
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