Vertical integration and product differentiation

Zanchettin, Piercarlo and Mukherjee, Arijit (2017) Vertical integration and product differentiation. International Journal of Industrial Organization . ISSN 1873-7986

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Abstract

We study a new channel of downstream rent extraction through vertical integration: competition for integration. Innovative downstream firms create value and profit opportunities through product differentiation, which however affects an upstream monopolist’s incentive to vertically integrate. By playing the downstream firms against each other for integration, the upstream firm can extract even more than the additional profits generated by the downstream firms’ differentiation activities. To preempt rent extraction, the downstream firms may then reduce differentiation, which reduces social welfare. We show that this social cost of vertical integration is more likely to arise in innovative and competitive industries, and that the competition for integration channel of downstream rent extraction is robust to upstream competition.

Item Type: Article
Keywords: Vertical integration; Product differentiation; Rent extraction; Product innovation; Market segmentation
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > Nottingham University Business School
Identification Number: 10.1016/j.ijindorg.2017.07.004
Depositing User: Eprints, Support
Date Deposited: 13 Sep 2017 12:44
Last Modified: 13 Sep 2017 19:34
URI: http://eprints.nottingham.ac.uk/id/eprint/46030

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