Chapter 2 - VERTICAL INTEGRATION IN A COURNOT SUCCESSIVE OLIGOPOLY

Abstract

This chapter examines a successive oligopoly model by allowing the horizontal market structure to change from a simple duopoly to an “n-firm” oligopoly. While comparing the three generic vertical structures in an n-firm successive Cournot oligopoly, it is found that the vertical structure of full integration leads to the highest output and the lowest price for consumers and, therefore, creates the greatest social welfare. The structure of exclusive supply contracts creates the double markup effect and the market elimination effect. These effects reduce the equilibrium output of the final products and lead to the lowest consumer welfare. The equilibrium output quantity of the final products under market transactions falls in the middle compared with the other two cases. When the number of firms in upstream and downstream industries increases, the horizontal market structure becomes less concentrated. The intensified competition increases the total output of final good independent of the industry vertical structure and the relative position of output quantities under these three generic vertical industrial structures remains unchanged.