Working Paper: CEPR ID: DP2647
Authors: Gilles Chemla
Abstract: This paper analyses the impact of competition among downstream firms on an upstream firm's payoff and on its incentive to vertically integrate when firms on both segments negotiate optimal contracts. We argue that tougher competition decreases the downstream industry profit, but improves the upstream firm's negotiation position. In particular, the upstream firm is better off encouraging competition when the downstream firms have high bargaining power. We derive implications on the interplay between vertical integration and competition among the downstream firms. The mere possibility of vertical integration may constitute a barrier to entry and may trigger strategic horizontal spin-offs or mergers. We discuss the impact of upstream competition on our results.
Keywords: bargaining; competition; contracts; foreclosure; vertical integration
JEL Codes: D40; L10; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tougher competition among downstream firms (L19) | Decreased overall profit in the downstream industry (L19) |
| Tougher competition among downstream firms (L19) | Enhanced negotiation position of upstream firm (D43) |
| High bargaining power of downstream firms (L14) | Upstream firm benefits from encouraging competition (L13) |
| Threat of vertical integration (L42) | Influences market structure (D40) |
| Negotiation dynamics (D74) | Strategic horizontal mergers or spinoffs (L14) |