Vertical Integration as a Source of Hold-up

Marie-Laure Allain (Ecole Polytechnique), Claire Chambolle (INRA) and Patrick Rey (Toulouse) discuss Vertical Integration as a Source of Hold-up.

ABSTRACT: While vertical integration is traditionally seen as a solution to the hold-up problem, this paper highlights instead that it can generate hold-up problems — for rivals. We first consider a successive duopoly where competition among suppliers eliminates any risk of hold-up; downstreamfirms thus obtain the full return from their investments. We then show that vertical integration creates hold-up concerns for the downstream rival, by affecting the integrated supplier’s incentives from both ex ante and ex post standpoints. We also provide illustrations in terms of standard industrial organization models and of antitrust cases, and discuss the robustness of the insights.