ON THE COMPETITIVE EFFECTS OF VERTICAL
INTEGRATION UNDER PRODUCT DIFFERENTIATION*
Joel Sandonís and Ramón Faulí-Oller**
WP-AD 2003-31
Corresponding author: Ramón Faulí-Oller, Universidad de Alicante, Departamento de Fundamentos de
Análisis Económico, Campus de San Vicente del Raspeig, 03071 Alicante, Spain. Phone 34 965 90 34 00
(ext. 3226), Fax 34 965 90 38 98, E-mail: [email protected].
Editor: Instituto Valenciano de Investigaciones Económicas, S.A.
Primera Edición Septiembre 2003
Depósito Legal: V-4051-2003
IVIE working papers offer in advance the results of economic research under way in order to
encourage a discussion process before sending them to scientific journals for their final
publication.
* The paper was written while the first author was visiting the Universidad de Alicante, whose hospitality
is acknowledged. We thank audiences at Universidad Carlos III, Universidad de Alicante, Universidad de
Navarra, 2002 EARIE Meeting and 2002 Simposium de Análisis Económico for their comments.
Financial support from BEC 2000/0301, UPV HB 8238/2000 AND 9/UPV 00035.321-13560/2001
(Sandonís) and BEC2001-0535, GV01-391 and the IVIE (Faulí-Oller) is also gratefully acknowledged.
** J. Sandonís: Universidad del País Vasco, Departamento de Fundamentos de Análisis Económico; R.
Faulí-Oller: Universidad de Alicante, Departamento de Fundamentos de Análisis Económico.
ON THE COMPETITIVE EFFECTS OF VERTICAL INTEGRATION
UNDER PRODUCT DIFFERENTIATION
Joel Sandonís and Ramón Faulí-Oller
ABSTRACT
The result of neutrality of vertical integration for competition postulated
by the Chicago School can be supported by a benchmark model with (1) an
upstream monopolist, (2) homogeneous goods downstream and (3) observable
(two-part tariff) contracts. The result does not hold however, whenever any of the
three assumptions is relaxed. Rey and Tirole (1999) show that, with secret
contracts, vertical integration is profitable and anticompetitive. The present
paper shows that, adding an alternative supplier and product differentiation to
the benchmark model, the effects of vertical integration depend on the efficiency
level of the alternative supplier. When the alternative supply is relatively efficient,
we also obtain that vertical integration is profitable and anticompetitive.
However, when the alternative supplier is relatively inefficient, vertical
integration becomes unprofitable and increases social welfare.
JEL Classification: L22, K21, D4
Keywords: Vertical integration, market foreclosure, two-part tariff contracts.
2
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