Wednesday, April 25, 2012

Backwards Integration and Strategic Delegation

Posted by D. Daniel Sokol

Matthias Hunold (ZEW), Lars-Hendrik Roller (ZEW), and Konrad O Stahl (University of Mannheim) explore Backwards Integration and Strategic Delegation.

ABSTRACT: We analyze the effects of one or more downstream firms’ acquisition of pure cash flow rights in an efficient upstream supplier when firms compete in prices in both markets. With such an acquisition, downstream firms internalize the effects of their actions on that supplier’s and thus, their rivals’ sales. Double marginalization is enhanced. While vertical integration would lead to decreasing downstream prices, passive backwards ownership in the efficient supplier leads to increasing downstream prices and is more profitable, as long as competition is sufficiently intensive. Downstream acquirers strategically abstain from vertical control, inducing the efficient upstream firm to commit to a high price. Forbidding upstream price discrimination is then pro-competitive. All results are sustained when upstream suppliers are allowed to charge two part tariffs.

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