Tuesday, August 2, 2011
Posted by D. Daniel Sokol
Emmanuel Frot, Microeconomix, Stockholm School of Economics explains The Empirics of Vertical Integration and Foreclosure.
ABSTRACT: Economic theory underlines that vertical mergers are very likely to lead to efficiencies and benefit consumers. On the other hand, more recent research found that vertical integration can also be used as an anti-competitive tool by firms, and harm consumers, notably through foreclosure. These opposing effects make the assessment of vertical mergers a subtle exercise. This article argues that because of the complexity of the issue, it is important to rely on empirical studies to understand in practice the consequences of vertical integration. It reviews three recent articles on vertical mergers to better illustrate what can be learned ex post from such studies and the methods employed. It then looks at the TomTom/Tele Atlas merger where the European Commission ex ante conducted an evaluation of the incentives to foreclose by the new proposed entity. Econometric tools provide interesting insights on the mechanisms at play in vertical mergers, both ex ante and ex post, and therefore usefully complete economic theory.