Market Structure and the Competitive Effects of Vertical Integration

Posted by D. Daniel Sokol

Simon Loertscher (Department of Economics, University of Melbourn) and Markus Reisinger (Economics Department, WHU - Otto Beisheim School of Management) have written on Market Structure and the Competitive Effects of Vertical Integration.

ABSTRACT: We analyze the competitive effects of backward vertical integration in a model with oligopolistic firms that exert market power upstream and downstream. In contrast to previous literature, we show that a small degree of vertical integration is always procompetitive because efficiency effects dominate foreclosure effects. Moreover, vertical integration even to monopoly can be procompetitive. With regard to market structure, we find, somewhat surprisingly, that vertical integration is more likely to be procompetitive if the industry is more concentrated. Our model thus suggests that antitrust authorities should be particularly wary of vertical integration in relatively competitive industries. We demonstrate that the quantitative welfare effects can be substantial there.