Vertical integration and downstream collusion |
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| Affiliation: | 1. Université de Caen-Normandie, CREM, France;2. Université Paris Dauphine, PSL Research University, LEDa and CEREMADE, France;1. Kent State University, Department of Economics, College of Business Administration, P.O. Box 5190, Kent, OH 44242, United States;2. Purdue University, Department of Economics, Krannert School of Management, 403 West State Street, West Lafayette, IN 47907-2056, United States;1. Department of Economics, Econometrics and Finance, University of Groningen, PO Box 800, Groningen 9700 AV, The Netherlands;2. Netherlands Authority for Consumers & Markets (ACM), PO Box 16326, The Hague 2500 BH, The Netherlands |
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| Abstract: | We investigate the effect of a vertical merger on downstream firms’ 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 firm, while optimal punishment erases the difficulty related to the asymmetries in the non-cooperative state. As a result, vertical integration generally favors collusion. |
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