Downstream Competition, Foreclosure, and Vertical Integration |
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Authors: | Gilles Chemla |
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Affiliation: | Faculty of Commerce University of British Columbia 2053 Main Mall, Vancouver British Columbia V6T 1Z2, Canada Thema (CNRS), and CEPR |
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Abstract: | This paper analyzes the effect of competition among downstream firms on an upstream firm's payoff and on its incentive to integrate vertically when firms in both segments negotiate optimal contracts. We argue that as downstream competition becomes more intense, the upstream firm obtains a larger share of a smaller downstream industry profit. The upstream firm may encourage downstream competition (even excessively) in response to high downstream bargaining power. The option of vertical integration may be a barrier to entry downstream and may trigger strategic horizontal spinoffs or mergers. We extend the analysis to upstream competition. |
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