On Vertical Mergers and Their Competitive Effects
Volume: Volume 32, No. 4
Issue: Winter 2001
Pages: pp. 667-685
Authors: Yongmin Chen
Title: On Vertical Mergers and Their Competitive Effects
Abstract: It is well known that vertical integration can change the pricing incentive of an upstream producer. However, it has not been noticed that vertical integration may also change the pricing incentive of a downstream producer and the incentive of a competitor in choosing input suppliers. I develop an equilibrium theory of vertical merger that incorporates these additional strategic considerations. Under fairly general conditions, a vertical merger will result in both efficiency gains and a collusive effect. The competitive effects of a vertical merger depend on the cost of switching suppliers and the degree of downstream product differentiation.