Bilateral Monopoly, Successive Monopoly, and Vertical Integration

Abstract

What are the effects of integration upon output and prices ? If an industry has been vertically fragmented , that is, if it has consisted of a number of separate firms each operating in only one of the successive stages of production, and if such firms are now combined by vertical merger , should one expect that, as a result of the integration, the total physical output of the industry will be increased and the price of the ultimate product reduced ? The affirmative answer to this question has been supported by many economists for a long time; but there have been others who denied the contention and again others who argued the opposite. The different answers were, of course, based on different sets of assumptions. The two major points of emphasis have been cost and market position. Some writers have believed that integration would do little to alter market positions but might substantially alter costs. There is the possibility of economies of integration, especially where technology is changing and productive establishments, hitherto spatially separated, are brought together; but there is also the possibility of diseconomies through a loss of specialization. Other writers have believed that integration would do little to alter costs but might substantially alter market positions. There is the possibility that monopolistic positions are extended, strengthened or consolidated by the merger; but there is also the possibility that existing monopolistic restrictions are relaxed and monopoly prices reduced as a result of the merger.' In this article we shall not concern ourselves with technology and production cost, but only with changing market structure and pricing practices.