Tuesday, October 28, 2008
Posted by D. Daniel Sokol
Hans-Theo Normann (University of London - Department of Economics) writes on Vertical Integration, Raising Rivals' Costs and Upstream Collusion in his latest working paper.
ABSTRACT: This paper analyzes the impact vertical integration has on upstream collusion when the price of the input is linear. As a first step, the paper derives the collusive equilibrium that requires the lowest discount factor in the infinitely repeated game when one firm is vertically integrated. It turns out this is the joint-profit maximum of the colluding firms. The discount factor needed to sustain this equilibrium is then shown to be unambiguously lower than the one needed for collusion in the separated industry. While the previous literature has found it difficult to reconcile raising-rivals-costs strategies following a vertical merger with equilibrium behavior in the static game, they are subgame perfect in the repeated game studied here.