A note on vertical integration as entry

This paper examines the incentive for an intermediate product monopolist to integrate forward into a competitively-structured final product industry when that industry has failed to achieve a position of long-run equilibrium. It is shown that the upstream monopolist's profits are increased more by entering the downstream industry than are the profits of other firms unrelated to this industry. Consequently, the monopolist is more likely to overcome whatever entry barriers might exist at the downstream stage. The welfare effects of this form of integration are shown to be positive, and a theoretical foundation is provided for the policy distinction commonly made between vertical integration by a major acquisition versus integration through internal expansion or a toehold acquisition followed by expansion.