Economics - Research Publications

Permanent URI for this collection

http://hdl.handle.net/11343/417

Filters

2005 1
1
Reset filters

Settings
Statistics
Citations
Type: Journal Article × Author: de Fontenay, Catherine × Subject: Economic Theory ×

Search Results

Now showing 1 - 1 of 1
  • Item
    Thumbnail Image
    Vertical integration in the presence of upstream competition
    de Fontenay, CC ; Gans, JS (WILEY, 2005-09-01)
    We analyze vertical integration in the case of upstream competition andcompare outcomes to the case where upstream assets are owned by a single agent(i.e., upstream monopoly). In so doing, we make two contributions to themodelling of strategic vertical integration. First, we base industry structure –namely, the ownership of assets – firmly within the property rights approach tofirm boundaries. Second, we model the potential multilateral negotiations using afully specified, non-cooperative bargaining model designed to easily compareoutcomes achieved under upstream competition and monopoly. Given this, wedemonstrate that vertical integration can alter the joint payoff of integratingparties in ex post bargaining; however, this bargaining effect is stronger for firmsintegrating under upstream competition than upstream monopoly. We alsoconsider the potential for integration to internalize competitive externalities in amanner that cannot be achieved under non-integration; i.e., by favouring internalover external supply. We demonstrate that ex post monopolization is more likelyto occur when there is an upstream monopoly than when there is upstreamcompetition. Our general conclusion is that the simple intuition that the presenceof upstream competition can mitigate and reduce the incentives for sociallyundesirable vertical integration is misplaced and, depending upon the strength ofdownstream competition (i.e., product differentiation), the opposite could easilybe the case.