On Vertical Mergers and Their Competitive Effects

Abstract

It is well known that vertical integration can change an upstream producer's incentive to supply the integrated …rm's downstream rivals.However, it has not been noticed that vertical integration also changes these rivals' incentives to choose suppliers.This paper develops an equilibrium theory of vertical merger that incorporates strategic behaviors in the input market of both the integrated …rm and the (downstream) rivals.Under fairly general conditions, vertical mergers will result in both e¢ciency gains and a collusive e¤ect, and a familiar measure concerning product di¤erentiation can be used to evaluate whether a vertical merger tends to bene…t or harm consumers.