Publication: Vertical integration, market floreclosure and quality investment
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2012-04
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Springer
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Abstract
We study incentives to vertically integrate in an industry with vertically
differentiated downstream firms. Vertical integration by one of the firms
increases production costs for the rival. Increased production costs negatively
affects quality investment both by the integrated firm and the unintegrated
rival. Quality investment by both firms decreases under any (vertical integration)
scenario. The decrease in quality invesment by both firms softens
competition among downstream firms. By integrating first, a firm always
produces the high quality good and earns higher profits. A fully integrated
industry, with increased product differentiation, is observed in equilibrium.
Due to increase in firm profits, social welfare under this structure is greater
than under no integration.
Description
Keywords
Vertical integration, Quality investment, Market power, Product differentiation
Bibliographic citation
Portuguese economic journal, v. 11, n. 1, apr. 2012, pp. 1-20