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Vertical Integration and Market Foreclosure with Convex Downstream Costs

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  • Pio Baake
  • Ulrich Kamecke
  • Hans-Theo Normann

Abstract

In a framework with an upstream monopoly and a downstream duopoly, we analyze the impact of convex costs on the downstream level. In constrast to the case of constant marginal costs, vertical integration does not imply complete market foreclosure. While the nonintegrated downstream ¯rm receives a strictly positive amount of the intermediate good, the downstream allocation is ine±cient. However, a parametrized example indicates that competition at the downstream level may increase aggregate welfare.

Suggested Citation

  • Pio Baake & Ulrich Kamecke & Hans-Theo Normann, 2001. "Vertical Integration and Market Foreclosure with Convex Downstream Costs," Discussion Papers of DIW Berlin 260, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp260
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    References listed on IDEAS

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    1. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn.
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    7. Alexander, Cindy R & Reiffen, David, 1995. "Vertical Contracts as Strategic Commitments: How Are They Enforced?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 623-649, Winter.
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    Cited by:

    1. Giuranno, Michele G. & Scrimitore, Marcella & Stamatopoulos, Giorgos, 2019. "Vertical Integration under an Optimal Tax Policy: a Consumer Surplus Detrimental Result," ETA: Economic Theory and Applications 294195, Fondazione Eni Enrico Mattei (FEEM).
    2. Salim, Claudia, 2009. "Optional linear input prices in vertical relations," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 258, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Salim, Claudia, 2009. "Optional linear input prices in vertical relations," Discussion Papers 2009/4, Free University Berlin, School of Business & Economics.
    4. Baake, Pio & Kamecke, Ulrich & Normann, Hans-Theo, 2004. "Vertical foreclosure versus downstream competition with capital precommitment," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 185-192, February.
    5. Giuranno, Michele G. & Scrimitore, Marcella & Stamatopoulos, Giorgos, 2020. "Subsidy policies and vertical integration in times of crisis: Can two virtues produce an evil?," MPRA Paper 104413, University Library of Munich, Germany.

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    More about this item

    Keywords

    Vertical restraints; commitment;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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