Abstract
This chapter examines some controversial issues that involve vertical integration by exploring a simple successive duopoly model. The successive duopoly model shows that the economic consequences of vertical integration depend on how the intermediate inputs transactions are organized before vertical integration takes place. If the vertical structure is governed by market transactions, the total impact of vertical integration can be separated into a market elimination effect and a pure vertical integration effect, with the former represented by an exclusive contractual relationship. The pure vertical integration effect increases the output of final goods and economic welfare; the market elimination effect does the opposite. The welfare effect of supply contracts depends on the type of game played between the upstream firms. If the upstream firms change their strategic variable from quantity to price, supply contracts might do no harm to final consumers. Economic welfare can be improved if this type of contract is replaced by some other mechanisms, such as vertical integration.
Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
