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American Economic Review: Vol. 97 No. 4 (September 2007)
AER Volume. 97, Issue 4 | 
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Do Vertical Mergers Facilitate Upstream Collusion?
Article Citation
Nocke, Volker, and
Lucy White. 2007. "Do Vertical Mergers Facilitate Upstream Collusion?."
American Economic Review,
97(4): 1321-1339.
DOI: 10.1257/aer.97.4.1321
DOI: 10.1257/aer.97.4.1321
Abstract
We investigate the impact of vertical mergers on upstream firms' ability to collude
when selling to downstream firms in a repeated game. We show that vertical mergers
give rise to an outlets effect: the deviation profits of cheating unintegrated firms
are reduced as these firms can no longer profitably sell to the downstream affiliates
of their integrated rivals. Vertical mergers also result in an opposing punishment
effect: integrated firms typically make more profit in the punishment phase
than unintegrated upstream firms. The net result of these effects in an unintegrated
industry is to facilitate upstream collusion. We provide conditions under which further
vertical integration also facilitates collusion. (JEL D43, G34, L12, L13)
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Link to Appendix (157.32 KB)
Authors
Nocke, Volker
White, Lucy
White, Lucy
