The strategic value of partial vertical integration |
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Affiliation: | 1. Charles River Associates, Inc., Washington DC 20004, United States;2. Department of Economics, Georgetown University, Washington DC 20057, United States;1. Department of Economics, Ryerson University, 380 Victoria Street, Toronto, ON M5B 2K3, Canada;2. Department of Economics, University of Crete, Rethymno, Crete, 74100, Greece |
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Abstract: | We investigate the strategic incentives for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when retailers privately know their costs and engage in price competition with differentiated goods. The partial misalignment between the profit objectives within a partially integrated manufacturer–retailer hierarchy implies a higher retail price than under full integration. This ‘information vertical effect’ translates into a ‘competition horizontal effect’: the partially integrated hierarchy's commitment to a higher price induces the competitor to increase its price, which strategically relaxes competition. Our analysis provides implications for vertical merger policy and theoretical support for the recently documented empirical evidence on partial vertical acquisitions. |
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Keywords: | Asymmetric information Partial vertical integration Vertical mergers Vertical restraints |
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