Backwards Integration and Strategic Delegation

27 Pages Posted: 4 Apr 2012

See all articles by Matthias Hunold

Matthias Hunold

ZEW – Leibniz Centre for European Economic Research

Lars-Hendrik Röller

ESMT European School of Management and Technology; Centre for Economic Policy Research (CEPR); WZB Berlin Social Science Center - Competitiveness and Industrial Change

Konrad O. Stahl

University of Mannheim - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2012

Abstract

We analyze the effects of one or more downstream firms’ acquisition of pure cash flow rights in an efficient upstream supplier when firms compete in prices in both markets. With such an acquisition, downstream firms internalize the effects of their actions on that supplier’s and thus, their rivals’ sales. Double marginalization is enhanced. While vertical integration would lead to decreasing downstream prices, passive backwards ownership in the efficient supplier leads to increasing downstream prices and is more profitable, as long as competition is sufficiently intensive. Downstream acquirers strategically abstain from vertical control, inducing the efficient upstream firm to commit to a high price. Forbidding upstream price discrimination is then pro-competitive. All results are sustained when upstream suppliers are allowed to charge two part tariffs.

Keywords: common agency, double marginalization, partial cross ownership, strategic delegation, vertical integration

JEL Classification: L22, L40

Suggested Citation

Hunold, Matthias and Röller, Lars-Hendrik and Stahl, Konrad O., Backwards Integration and Strategic Delegation (March 2012). CEPR Discussion Paper No. DP8910, Available at SSRN: https://ssrn.com/abstract=2034128

Matthias Hunold (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

Universitätsstr. 1
Düsseldorf, 40225
Germany

Lars-Hendrik Röller

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin, 10178
Germany

HOME PAGE: http://www.esmt.org/eng/faculty-research/lars-hendrik-roeller/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

WZB Berlin Social Science Center - Competitiveness and Industrial Change ( email )

Reichpietschufer 50
10785 Berlin
Germany
+49 30 2549 1440 (Phone)
+49 30 2549 1442 (Fax)

Konrad O. Stahl

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany
+49 621 181 1875 (Phone)
+49 621 181 1874 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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