How Do Market Structures Affect Decisions on Vertical Integration/Separation?

ISER Discussion Paper No.770

28 Pages Posted: 6 Feb 2010

See all articles by Noriaki Matsushima

Noriaki Matsushima

Osaka University - Institute of Social and Economic Research (ISER)

Tomomichi Mizuno

Faculty of Economics, University of Nagasaki

Date Written: February 4, 2010

Abstract

We provide a simple model to investigate decisions on vertical integration/separation. The key feature of this model is that more than one input is required for the final products of the local downstream monopolists. Depending on their cost structure, downstream firms’ decisions on vertical separation can be both strategic complements and strategic substitutes. As a result, the equilibrium number of vertically integrated firms depends on the cost structure. When the local downstream monopolists merge, vertical separation tends to appear in equilibrium. When an upstream firm can price discriminate, the downstream firms vertically separate. When the downstream firms compete with each other, vertical integration tends to appear if the degree of product differentiation is lower.

Keywords: vertical integration, vertical separation, local monopolists, inputs, technology

JEL Classification: D43, L13, L22, M11

Suggested Citation

Matsushima, Noriaki and Mizuno, Tomomichi, How Do Market Structures Affect Decisions on Vertical Integration/Separation? (February 4, 2010). ISER Discussion Paper No.770, Available at SSRN: https://ssrn.com/abstract=1547543 or http://dx.doi.org/10.2139/ssrn.1547543

Noriaki Matsushima (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

Tomomichi Mizuno

Faculty of Economics, University of Nagasaki ( email )

123
Kawashimo-cho
Sasebo-city, Nagasaki 858-8580
Japan

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