Abstract
Using the property rights approach, I investigate how two vertical chains consisting of an upstream and downstream firm choose to integrate when competing in a duopoly market. This shows that whether a vertical chain chooses to integrate depends on the relative sizes of two strategic effects on quantity and investment. If the negative effect of decreasing investments is larger (smaller) than the positive effect of alleviating an intense quantity competition, vertical separation (integration) is chosen. I illustrate that vertical separation or integration appears in equilibrium depending on the degrees of market competitiveness and investment effectiveness.
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