Vertical integration under optimal taxation: A consumer surplus detrimental result

Vertical integration in environments without foreclosure, or more generally without any obstacles that restrict competition in the market, and subsidization of firms are two separate mechanisms that have pro-competitive effects. In this paper we show that subsidization can corrode the positive welfa...

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Bibliographic Details
Published in:Economics letters 2023-01, Vol.222, p.110919, Article 110919
Main Authors: Giuranno, Michele G., Scrimitore, Marcella, Stamatopoulos, Giorgos
Format: Article
Language:English
Subjects:
Consumer surplus
Integration
Subsidy policy
Vertical industry
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Summary:Vertical integration in environments without foreclosure, or more generally without any obstacles that restrict competition in the market, and subsidization of firms are two separate mechanisms that have pro-competitive effects. In this paper we show that subsidization can corrode the positive welfare effects of vertical integration, as the latter induces the government to subsidize firms’ output to a lesser extent. This causes an output reduction that lowers consumer surplus. •We examine the interplay between integration and subsidies in a two-layer industry.•Each of the two is pro-competitive when it is used separately.•Surprisingly the two are anti-competitive when they are used jointly.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2022.110919