2003 Reports

Vertical integration, exclusive dealing, and ex post cartelization

Chen, Yongmin; Riordan, Michael H.

A vertically integrated firm has the incentive and ability to use exclusive contracts to foreclose an equally efficient upstream competitor and to effect a cartelization of the downstream industry. Its ability to do so may be limited when downstream firms are heterogeneous and supply contracts are not contingent on uncertain market conditions. The extent of cartelization depends on the degree of downstream market concentration and on the degree to which downstream competition is localized.