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A Fixed Effect Model of Endogenous Integration Decision and Its Competitive Effects

Author

Listed:
  • Kerem Cakirer

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

Abstract

This paper studies endogenous integration decisions of firms and its competitive effects in a complementary market setting where downstream firms sell a product which must have a compatible variety of products that are supplied by upstream firms. I present the conditions under which a downstream firm will prefer integrating with an upstream firm, and conditions under a counter merger of firms occur. The analysis shows that a vertical merger is more likely to occur whenever one of the upstream firm is significantly productive than the other. Competitive effect of a integration of two firms can lead to a counter integration of rivals post integration. Counter integration is likely whenever both upstream firms are highly productive. In addition to a vertical merger and two vertical mergers, contracting under independent ownership can also be the method of procuring. As a result, no integration activity can be observed. The results are obtained in a general two downstream firms and two upstream firms market setting that allows efficient compatibility contracts between upstream and downstream producers.

Suggested Citation

  • Kerem Cakirer, 2007. "A Fixed Effect Model of Endogenous Integration Decision and Its Competitive Effects," Working Papers 2007-18, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    • Handle: RePEc:iuk:wpaper:2007-18
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    File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2007-18-cakirer.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Endogenous Vertical Integration; Positive Externality; Complementary Products; Product Variety;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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