American Economic Review Vol. 97 No. 4 2007

Do Vertical Mergers Facilitate Upstream Collusion?

Volker Nocke¹; Lucy White²

¹ Department of Economics, Oxford University, Manor Road Building, Oxford OX1 3UQ, UK, and Centre for Economic Policy Research. · ² Harvard Business School, Université de Lausanne, CH-1015 Dorigny, Switzerland, and CEPR.

Abstract

We investigate the impact of vertical mergers on upstream firms' ability to collude when selling to downstream firms in a repeated game. We show that vertical mergers give rise to an outlets effect: the deviation profits of cheating unintegrated firms are reduced as these firms can no longer profitably sell to the downstream affiliates of their integrated rivals. Vertical mergers also result in an opposing punishment effect: integrated firms typically make more profit in the punishment phase than unintegrated upstream firms. The net result of these effects in an unintegrated industry is to facilitate upstream collusion. We provide conditions under which further vertical integration also facilitates collusion.

DOI

10.1257/aer.97.4.1321

Volume

97

Issue

4

Pages

1321-1339

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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