Abstract
This paper studies the prevalence of potential anticompetitive effects of vertical mergers using a novel data set on U.S. and international buyer-seller relationships and across a large range of industries. We find that relationships are more likely to break when suppliers vertically integrate with one of the buyers’ competitors than when they vertically integrate with an unrelated firm. This relationship holds for both domestic and cross-border mergers and for domestic and international relationships. It also holds when instrumenting mergers using exogenous downward pressure on the supplier’s stock prices, suggesting that reverse causality is unlikely to explain the result. In contrast, the relationship vanishes when using rumored or announced but not completed integration events. Firms experience a substantial drop in sales when one of their suppliers integrates with one of their competitors. This sales drop is mitigated if the firm has alternative suppliers in place. These findings are consistent with anticompetitive effects of vertical mergers, such as vertical foreclosure, rising input costs for rivals, or self-foreclosure. This paper was accepted by Joshua Gans, business strategy. Funding: This work was supported by a Banque de France/Sciences Po Partnership. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2022.4363 .
Highlights
Vertical integration of two firms has the potential to increase their economic efficiency by exploiting synergies in the design, production, and distribution of their goods and services
The correlation we find does not immediately imply that vertical market foreclosure is taking place in the population of firms and relationships that we study
We find that the correlation between buyer-supplier-links breaking and vertical integration of a supplier with a competitor is lower when the supplier has more competitors (columns (1) and (2))
Summary
Vertical integration of two firms has the potential to increase their economic efficiency by exploiting synergies in the design, production, and distribution of their goods and services. The integrated firm might use its access to the bottleneck to extend or preserve its market power in the upstream markets by refusing to provide rival firms in downstream markets with access to the bottleneck. These firms are said to be foreclosed. While a large theoretical literature investigates the motives for vertical foreclosure, empirical evidence of firms using foreclosure as a business strategy is restricted to a few very particular cases, not least because vertical relationships are rarely observed. Even less is known about potential strategies to mitigate the effects of being foreclosed
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