Vertical Mergers and Market Foreclosure

Abstract

yThe model in this paper illustrates three effects of vertical mergers when both stages are oligopolistic and vertically integrated and unintegrated producers coexist. First, the merging firm increases its final good output. Second, the resulting backward shift in the residual demand curve facing unintegrated final good producers ylowers their demand for the intermediate good. Third, the merged firm withdraws from the intermediate good market. The increased concentration pushes the intermediate good price upward. Which effect dominates depends on market structure. Under some conditions, a vertical merger causes the price of the final good to increase.