Abstract
This paper derives a model of vertical integration when it is difficult to write bindinglong-term supply price contracts. Thus, a vertically separated monopolist is vulnerable tohold-up. Without integration, we demonstrate that a bottleneck monopolist has anincentive to encourage more firms in a related segment than would arise in a puremonopoly. Having more firms mitigates the hold-up power of any one. This, however,distorts the cost structure of the industry toward greater industry output and, hence,lowers final good prices. Vertical integration mitigates the hold-up problem faced by themonopolist. It allows it to generate and appropriate a greater share of monopoly profits.Horizontal competition mitigates the anti-competitive effects of integration
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