Wednesday, February 23, 2011
Posted by D. Daniel Sokol
Markus Reisinger, University of Munich - Economics Department, CESifo (Center for Economic Studies and Ifo Institute for Economic Research) and Emanuele Tarantino, University of Bologna - Department of Economics, Tilburg Law and Economics Center (TILEC) address Vertical Integration with Complementary Inputs.
ABSTRACT: We analyze the profitability and welfare consequences of vertical integration when downstream firms deal with suppliers of complementary intermediate goods that exert market power. We show that the results in this setting are markedly different from those of the received literature that deals only with substitute intermediate goods. In particular, vertical integration is not necessarily profitable since the integrated firm faces the problem that the complementary input producer expropriates the higher profits earned by the integrated chain on the downstream market. Interestingly, this effect is particularly strong is the integrated firm is very efficient. We also show that if vertical integration is profitable, foreclosure of downstream rivals is no longer the optimal strategy of the integrated firm. Instead, the integrated firm may set prices even below marginal costs thereby rendering vertical integration pro-competitive, which has profound consequences on antitrust policy.