Vertical integration, contestable markets, and the misfortunes of the misshaped U

Expert InsightsPublished 1982

This paper models the vertical integration of an upstream monopolist who sells an intermediate good to firms in a contestable downstream market. The downstream firms combine that good with other inputs, according to a production function with U-shaped average costs, to produce a final good which is sold to consumers at minimum average cost. One theme of the paper is to compare the incentives for and results of vertical integration when the upstream market is protected from entry with those when the upstream market is contestable. The results suggest that vertical mergers should be encouraged in the latter case but tolerated in the former only under specific guidelines. The second theme is to explore the effects on the scale of firms in the downstream industry of the monopolization of the upstream market and of vertical integration. Monopolization upstream may cause distortions in the scale of downstream firms, and such scale distortions create incentives for integration. The use of a nonconstant return downstream technology also helps to explain partial forward integration.

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Document Details

  • Copyright: RAND Corporation
  • Availability: Web Only
  • Year: 1982
  • Pages: 98
  • Document Number: P-6782

Citation

Chicago Manual of Style

Vertical integration, contestable markets, and the misfortunes of the misshaped U. Santa Monica, CA: RAND Corporation, 1982. https://www.rand.org/pubs/papers/P6782.html.
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