Vertical Integration and Downstream Collusion Vertical Integration and Downstream Collusion * Preliminary Version

Sara Biancini, David Ettinger, Sara Biancini, David Ettinger
2015 unpublished
We investigate the effect of a vertical merger on downstream firms' ability to collude in a repeated game framework. We show that a vertical merger has two main effects. On the one hand, it increases the industry profits avoiding double marginalization, increasing the stakes of collusion. On the other hand, it creates an asymmetry between the integrated firm and the unintegrated competitors. The integrated firm, accessing the input at marginal costs, faces higher profits in the deviation phase
more » ... nd in the non cooperative equilibrium, which potentially harms collusion. As we show, the optimal collusive profit-sharing agreement takes care of the increased incentive to deviate of the integrated firm, while optimal punishment erases the difficulty related to the asymmetries in the non cooperative state. As a result, vertical integration generally increases collusion. The results holds under maximal punishments and we show that punishments harsher than standard Nash reversion are needed for this result to hold. JEL Classification: D43, L13, L40, L42.