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Academic Articles Awards > Economics

Vertical Integration, Foreclosure, and Productive Efficiency

Markus Reisinger and Emanuele Tarantino, The RAND Journal of Economics, Volume 46, Issue 3, pp. 461-479, Fall 2015

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We analyze the consequences of vertical integration by a monopoly producer dealing with two retailers (downstream firms) of varying efficiency via secret two-part tariffs. When integrated with the inefficient retailer, the monopoly producer does not foreclose the rival retailer due to an output-shifting effect. This effect can induce the integrated firm to engage in below-cost pricing at the wholesale level, thereby rendering integration procompetitive. Output shifting arises with homogeneous and differentiated products. Moreover, we show that integration with an inefficient retailer emerges in a model with uncertainty over retailers’ costs, and this merger can be procompetitive in expectation.

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