DP4066 Who Integrates?

Author(s): Stefan Bühler, Armin Schmutzler
Publication Date: September 2003
Keyword(s): efficiency, foreclosure, vertical integration, vertically-related oligopolies
JEL(s): L13, L22, L40, L82
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4066

We examine vertical backward integration in oligopoly. Analysing a standard linear Cournot model, we find that for wide parameter ranges (i) some firms integrate, while others remain separated, and (ii) efficient firms are more likely to integrate vertically. Adopting a reduced-form approach, we identify a wholesale price effect and demand/mark-up complementarities as the driving forces for our results. We show that our results generalize beyond the Cournot example under fairly natural assumptions.