DP1293 Excess Entry, Vertical Integration and Welfare

Author(s): Kai-Uwe Kühn, Xavier Vives
Publication Date: November 1995
Keyword(s): Excess Entry, Preference for Variety, Vertical Integration
JEL(s): L1, L42
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1293

This paper provides a systematic analysis of the welfare effects of vertical integration by a monopolistic input supplier into a monopolistically competitive downstream industry. We give sufficient conditions on consumer preferences that lead to Pareto improving vertical integration. We demonstrate a close relationship between assumptions on preference for variety, excess entry in monopolistically competitive markets, and the welfare effects of vertical integration. Both excess entry and welfare improving vertical integration arise only if preference for variety falls as variety increases for given total output.