Working Paper: CEPR ID: DP10914
Authors: Patrick Legros; Andrew Newman
Abstract: Industrial organization's concern with vertical integration has traditionally been limited to considering the effects on market outcomes, in particular product prices: they increase because integration enhances market power, or they decrease because it yields efficiency gains. This note offers a theoretical argument for reverse causality, from prices -- more generally, demand -- to integration. If, as many organizational theories in suggest, integration has positive effects on production efficiency and has any costs that are largely independent of output, then bearing those costs is more attractive when prices are higher, as when there is high demand. Therefore high prices lead to more integration. We discuss evidence for this reverse causality and its implications for regulation.
Keywords: vertical integration; demand-driven integration; divorcement policy; dynamic oligopoly; market power
JEL Codes: D23; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Divorcement (J12) | Higher Prices (D49) |
| Demand (R22) | Integration (F15) |
| Integration (F15) | Collusion Dynamics (D74) |
| Demand (R22) | Prices (D49) |
| Integration (F15) | Prices (D49) |