Does Vertical Integration Promote Downstream Incomplete Collusion? An Evaluation of Static and Dynamic Stability (original) (raw)

Do vertical mergers facilitate upstream collusion?

The American Economic Review, 2007

We investigate the impact of vertical mergers on upstream firms' ability to sustain tacit collusion in a repeated game. We identify several effects and show that the net effect of vertical integration is to facilitate collusion. Most importantly, vertical mergers facilitate collusion through the operation of an outlets effect: cheating unintegrated firms can no longer profitably sell to the downstream affiliates of their integrated rivals. However, vertical integration also gives rise to an opposing punishment effect: it is typically more difficult to punish an integrated structure, so that integrated firms are able to make more profits in the punishment phase than unintegrated upstream firms. When downstream firms can condition their prices or quantities on upstream firms' contract offers, two additional effects arise, both of which further facilitate upstream collusion. First, an unintegrated upstream firm's deviation profits are reduced by the reaction effect which arises since the downstream unit of the integrated firm will now react aggressively to upstream deviations. Second, an integrated firm's deviation profit is reduced by the lack-of-commitment effect as it cannot commit to its own downstream price when deviating upstream.

The impact of vertical integration on losses from collusion

International Journal of Industrial Organization, 2021

Upstream collusion that increases the price of an input can harm an independent downstream supplier (D). We ask whether this harm is more or less pronounced when D's downstream rival is a vertically integrated supplier. The answer depends on the nature and intensity of downstream competition. Vertical integration (VI) tends to increase D's loss from collusion when downstream competition is relatively intense or D is a relatively strong competitor. VI tends to reduce D's loss from collusion when downstream competition is relatively limited and D is a relatively weak competitor or when the market demand for the downstream product is highly price inelastic.

Vertical integration, collusion, and tariffs

SERIEs, 2010

This article presents a link between tariff rates, collusion and industry structure. We examine the role of tariffs on final-goods as to a firm's decision to integrate and collude in the presence of competitive imports. It is shown that, under some conditions, the upstream firm has an incentive to engage in vertical integration to profitably introduce a wholesale price above the world input price while not inducing any intermediate or final good imports. Higher tariffs downstream, even with no tariff protection upstream, make this strategy more profitable, and provides a rationale for a positive relationship between tariff protection and vertical integration, that is observed in some industries.

Monopolization through endogenous vertical mergers

Research in Economics, 2007

While endogenous merger analysis has been applied to horizontal mergers, the thrust of vertical merger analysis has been based on exogenous mergers. The goal of this paper is to analyze endogenous vertical mergers. I consider a market structure with a downstream monopolist and an oligopolistic upstream industry. The downstream monopolist chooses to buy a certain number of the upstream firms. Mergers are endogenous, in the sense that the bids made by the downstream firm must be accepted by each of the integrated upstream firms, and must not exceed the increase in the profits of the downstream firm. It is shown that the unique equilibrium is complete monopolization: the buyer buys all the firms in the upstream industry. This result is consistent with the result that vertical mergers are profitable. However, it is in contrast with horizontal endogenous mergers, where complete monopolization is generally not an equilibrium.

Endogenous Mergers and Collusion in Asymmetric Market Structures

Economica, 2012

Recent empirical evidence shows that cartels are often asymmetric, while cartel theory suggests that firm symmetry is conducive to collusion. Including an indivisible cost of cartelization, we show that medium asymmetric market structures are more conducive to collusion, since they balance the small firms' incentives to stay in the cartel against the need to cover the cartel leaders' indivisible cartelization cost.

Horizontal Mergers in the Presence of Vertical Relationships

SSRN Electronic Journal, 2014

We study welfare effects of horizontal mergers under a successive oligopoly model and find that downstream mergers can increase welfare if they reduce input prices. The lower input price shifts some input production from costinefficient upstream firms to cost-efficient ones. Also, the lower input price makes upstream entry less attractive, reduces the number of upstream entrants, and decreases their average costs in the presence of fixed entry costs. We identity necessary and sufficient conditions for a reduction in input prices and welfare-improving horizontal mergers under a general demand function. Qualitative nature of our findings remains unchanged for upstream mergers.

Vertical Mergers in a Model of Upstream Monopoly and Incomplete Information

Review of Industrial Organization, 2021

We examine the role of private information on the impact of vertical mergers. A vertical merger can improve the information that is available to an upstream monopolist because, after the merger, the monopolist can observe the cost of its downstream merger partner. In the pre-merger world, because the costs of the downstream firms are private information, the monopolist has incomplete information and cannot implement the monopoly outcome: The expected pre-merger equilibrium price of the downstream product is lower than the monopoly price. After a vertical merger, the equilibrium input price that is charged to the downstream rival can either increase or decrease-depending on whether the downstream merger partner's cost is low or high, respectively. However, in all cases the equilibrium price of the downstream product increases to the monopoly price. Therefore, the merger leads to consumer harm even when it leads to a reduction in the input price. The merged firm, however, cannot extract all of the monopoly profit: The merger causes production inefficiency (when the downstream rival has a relatively small cost advantage) and the downstream rival still earns an information rent (when it has a relatively large cost advantage). These results also have implications for vertical merger policy.

Assessment of Mergers Inducing Coordinated Effects in the Presence of Explicit Collusion

World Competition: Law and Economics Review, Vol. 31, No. 4., 2008

This article will analyse the issue of the assessment of the likelihood of a merger in a cartelised market inducing or enhancing coordinated effects.Although there is decisional practice on the impact of past coor- dination on the assessment of a merger’s likelihood of inducing coordinated effects, such decisional guidance is very rare as regards the assessment of mergers in cartelised markets. Mergers in cartelised markets should be assessed on a case-by-case basis.A presumption of illegality for such mergers should be avoided. A case-by-case analysis focusing on the pre-merger and post-merger market structure as well as on the incentives for continuing the collusion in the post-merger market has significantly more merit. Mergers in cartelised industries are not the cause of the adverse impact on competition.What should be assessed is the harm of the merger itself in the already anticompetitive market. If the merger induces a significant impediment to the existing level of reduced competition, then the merger should not be cleared (at least not without remedies). The concept of “significant” assumes great importance in such circumstances, as the merger may lead to an impediment but such impediment is not always significant in a market where explicit collusion occurs.