Do Vertical Mergers Facilitate Upstream Collusion?

We investigate the impact of vertical mergers on upstream firms' ability to collude when selling to downstream firms in a repeated game. We show that vertical mergers give rise to an outlets effect: the deviation profits of cheating unintegrated firms are reduced as these firms can no longer pr...

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Bibliographic Details
Published in:The American economic review 2007-09, Vol.97 (4), p.1321-1339
Main Authors: Nocke, Volker, White, Lucy
Format: Article
Language:English
Subjects:
Acquisitions & mergers
Antitrust
Business economics
Business structures
Cheating
Collusion
Economic competition
Economic concentration
Economic theory
Equilibrium
Fees
Final goods
Game theory
Industrial organization
Market share
Market shares
Mergers
Monopoly
Profits
Scholarships & fellowships
Studies
Vertical integration
Vertical mergers
Wholesale prices
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Summary:We investigate the impact of vertical mergers on upstream firms' ability to collude when selling to downstream firms in a repeated game. We show that vertical mergers give rise to an outlets effect: the deviation profits of cheating unintegrated firms are reduced as these firms can no longer profitably sell to the downstream affiliates of their integrated rivals. Vertical mergers also result in an opposing punishment effect: integrated firms typically make more profit in the punishment phase than unintegrated upstream firms. The net result of these effects in an unintegrated industry is to facilitate upstream collusion. We provide conditions under which further vertical integration also facilitates collusion.
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.97.4.1321