Vertical Foreclosure in the Cement Industry: Reply

Abstract

This is simply wrong. Curve MRU-MC, has two determinants. One is the demand for concrete. The other is the marginal cost of turning cement into concrete: water, aggregates, gasoline for transit mixers, etc. Neither of these is affected by the mere fact of vertical integration. It follows that the curve will not shift unless other factors are relevant. Meehan mentions two such other factors. First, he contends that the quality control exercised by an integrated firm over concrete would shift the curve. Possibly, but one would not condemn such a shift, since it would result from a chemically and structurally better product. Second, he suggests that cement companies are better practitioners of expense-account entertaining than nonintegrated concrete companies, and that the use of this technique to sell concrete results in a perverse type of product differentiation. However successful this might be in selling cement, I would expect it to sell very little concrete.4