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On The Competitive Effects Of Vertical Integration Under Product Differentiation

Author

Listed:
  • Ramón Faulí-Oller

    (Universidad de Alicante)

  • Joel Sandonís Díez

    (Universidad de Alicante)

Abstract

The result of neutrality of vertical integration for competition postulated by the Chicago School can be supported by a benchmark model with (1) an upstream monopolist, (2) homogeneous goods downstream and (3) observable (two-part tariff) contracts. The result does not hold however, whenever any of the three assumptions is relaxed. Rey and Tirole (1999) show that, with secret contracts, vertical integration is profitable and anticompetitive. The present paper shows that, adding an alternative supplier and product differentiation to the benchmark model, the effects of vertical integration depend on the efficiency level of the alternative supplier. When the alternative supply is relatively efficient, we also obtain that vertical integration is profitable and anticompetitive. However, when the alternative supplier is relatively inefficient, vertical integration becomes unprofitable and increases social welfare.

Suggested Citation

  • Ramón Faulí-Oller & Joel Sandonís Díez, 2003. "On The Competitive Effects Of Vertical Integration Under Product Differentiation," Working Papers. Serie AD 2003-31, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2003-31
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Vertical integration; market foreclosure; two-part tariff contracts.;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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