An Examination of the Efficiency, Foreclosure, and Collusion Rationales for Vertical Takeovers

Posted by D. Daniel Sokol

Jaideep Shenoy, Georgia State University - Department of Finance, suggests that vertical integration is not anti-competitive in his paper An Examination of the Efficiency, Foreclosure, and Collusion Rationales for Vertical Takeovers.

ABSTRACT: We investigate the efficiency, foreclosure, and collusion rationales for a large sample of vertical takeovers. The efficiency rationale posits that vertical integration prevents future holdup between non-integrated suppliers and customers. In contrast, the foreclosure and collusion rationales suggest that vertical integration harms competition. To distinguish between these hypotheses, we examine the announcement period wealth effects of the merging firms, acquirer rivals, target rivals, and corporate customers. Our results suggest that firms alter their vertical boundaries in a manner that is consistent with the efficiency rationale. Our tests do not find evidence supportive of the anti-competitive rationales for vertical integration.