How do market structures affect decisions on vertical integration/separation?

Posted by D. Daniel Sokol

Noriaki Matsushima (Institute of Social and Economic Research, Osaka University) and Tomomichi Mizuno (Competition Policy Research Center, Japan Fair Trade Commission) ask How do market structures affect decisions on vertical integration/separation?

ABSTRACT: We provide a simple model to investigate decisions on vertical integration/separation. The key feature of this model is that more than one input is required for the final products of the local downstream monopolists. Depending on their cost structure, downstream firms' decisions on vertical separation can be both strategic complements and strategic substitutes. As a result, the equilibrium number of vertically integrated firms depends on the cost structure. When the local downstream monopolists merge, vertical separation tends to appear in equilibrium. When an upstream firm can price discriminate, the downstream firms vertically separate. When the downstream firms compete with each other, vertical integration tends to appear if the degree of product differentiation is lower.