Vertical Integration and Downstream Collusion

La Chaire Recherche

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Auteur(s) David ETTINGER
Type de publication Working paper
Référence

GovReg Working Paper series | Issue 2017/04

We investigate the effect of a vertical merger on downstream rms' ability to collude in a repeated game framework. We show that a vertical merger has two main effects. On the one hand, it increases the total collusive profits, increasing the stakes of collusion. On the other hand, it creates an asymmetry between the integrated firm and the unintegrated competitors. The integrated firm, accessing the input at marginal cost, faces higher profits in the deviation phase and in the non cooperative equilibrium, which potentially harms collusion. As we show, the optimal collusive profit-sharing agreement takes care of the increased incentive to deviate of the integrated rm, while optimal punishment erases the diculty related to the asymmetries in the non cooperative state. As a result, vertical integration generally favors collusion.

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