Discussion Paper Details

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Title: Demand-Driven Integration and Divorcement Policy

Author(s): Patrick Legros and Andrew Newman

Publication Date: November 2015

Keyword(s): OIO, reverse causality, theory of the firm and vertical integration

Programme Area(s): Industrial Organization

Abstract: Industrial organization's concern with vertical integration has traditionally been limited to considering the effects on market outcomes, in particular product prices: they increase because integration enhances market power, or they decrease because it yields efficiency gains. This note offers a theoretical argument for reverse causality, from prices -- more generally, demand -- to integration. If, as many organizational theories in suggest, integration has positive effects on production efficiency and has any costs that are largely independent of output, then bearing those costs is more attractive when prices are higher, as when there is high demand. Therefore high prices lead to more integration. We discuss evidence for this reverse causality and its implications for regulation.

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Bibliographic Reference

Legros, P and Newman, A. 2015. 'Demand-Driven Integration and Divorcement Policy'. London, Centre for Economic Policy Research.