Abstract:
|
We investigate the strategic incentives for partial vertical integration, namely, partial
ownership agreements between manufacturers and retailers, when retailers privately know
their costs and engage in differentiated good price competition. The partial misalignment
between the profit objectives within a partially integrated manufacturer-retailer hierarchy
entails a higher retail price than under full integration. This `information vertical effect'
translates into an opposite `competition horizontal effect': the partially integrated hierarchy's
commitment to a higher price induces the competitor to increase its price, which
strategically relaxes competition. Our analysis provides implications for vertical merger
policy and theoretical support for the recently documented empirical evidence on partial
vertical acquisitions.
Keywords: asymmetric information, partial vertical integration, vertical mergers, vertical
restraints.
JEL Classification: D82, L13, L42. |