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Merge and Compete. Strategic incentives for vertical integration

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  • Filippo Vergara Caffarelli

    (Bank of Italy)

Abstract

Vertical integration followed by quantity competition is studied. In the first stage of the game downstream firms simultaneously decide whether to integrate with one of the upstream suppliers. If firms are not able to observe whether their vertically integrated competitor enters the intermediate-good market then they are indifferent about vertical integration. If the entry choice of the integrated firm is observable then the unique equilibrium involves vertical integration and in-house production of the intermediate good. The importance of entry observability sheds light on the strategic importance of information exchange institutions such as the internet and business fairs.

Suggested Citation

  • Filippo Vergara Caffarelli, 2006. "Merge and Compete. Strategic incentives for vertical integration," Temi di discussione (Economic working papers) 608, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_608_06
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    1. Filippo Vergara Caffarelli, 2007. "Merge and Compete: Strategic Incentives for Vertical Integration," Rivista di Politica Economica, SIPI Spa, vol. 97(5), pages 203-244, September.

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    More about this item

    Keywords

    Vertical integration; Cournot competition; Market entry;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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