Vertical integration, foreclosure, and productive efficiency

Abstract

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.

Patent pools, vertical integration, and downstream competition

“…See Reisinger and Tarantino () for a formal proof, or the proof of Lemma (where we derive the same result for the pool).…”

“…Although we could prove this result only with a demand function that satisfies this restriction, we reached similar conclusions using other non-linear functions. 32 See Reisinger and Tarantino (2015) for a related trade-off. 33 In contrast to the case of single integration, now both manufacturers are members of the pool via their upstream affiliates.…”

“…Because the integrated firm cannot commit to a downstream quantity in the first stage, any strictly positive internal patent price would be renegotiated to zero before manufacturers compete (see Reisinger and Tarantino, , for a formal proof).…”

“…If contracts are not observable, licensors will set the royalty rate to zero even without the pool, which implies that the pool is then also welfare neutral (see Section 6).28 Because the integrated firm cannot commit to a downstream quantity in the first stage, any strictly positive internal patent price would be renegotiated to zero before manufacturers compete (seeReisinger and Tarantino, 2015, for a formal proof). C The RAND Corporation 2019.…”

Anticompetitive Vertical Merger Waves

“…5 Other contributions include Salinger [1988] who considers Cournot competition in both markets, Salinger [1991] who studies a setting with a downstream monopoly and an upstream duopoly, and the strand of literature initiated by Hart and Tirole [1990] and surveyed by Rey and Tirole [2007], which analyzes the consequences of upstream secret offers, focusing mainly on the commitment problem faced by an upstream monopolist. See Avenel [2012] and Reisinger and Tarantino [2015] for recent contributions.…”