Working Paper: CEPR ID: DP1293
Authors: Kaiuwe Kuhn; Xavier Vives
Abstract: This paper provides a systematic analysis of the welfare effects of vertical integration by a monopolistic input supplier into a monopolistically competitive downstream industry. We give sufficient conditions on consumer preferences that lead to Pareto improving vertical integration. We demonstrate a close relationship between assumptions on preference for variety, excess entry in monopolistically competitive markets, and the welfare effects of vertical integration. Both excess entry and welfare improving vertical integration arise only if preference for variety falls as variety increases for given total output.
Keywords: vertical integration; excess entry; preference for variety
JEL Codes: L1; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Vertical Integration (L22) | Welfare Improvement (I38) |
| Vertical Integration (L22) | Welfare Reduction (I38) |
| Decreasing Preferences for Variety (D11) | Vertical Integration Reduces Welfare (D69) |
| Increasing Preferences for Variety (D11) | Vertical Integration Improves Welfare (D69) |
| Vertical Integration Eliminates Excess Entry (L22) | Welfare Improvement (I38) |
| Vertical Integration (L22) | Reduces Double Marginalization (C39) |
| Vertical Integration (L22) | Limits Excess Variety (L15) |
| Vertical Integration (L22) | Generates Less Excess Variety than Competitive Market (D41) |