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Vertical integration, exclusive dealing, and ex post cartelization.
- Article from:
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RAND Journal of Economics
- Article date:
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March 22, 2007
- Author:
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;
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Copyright informationCOPYRIGHT 2007 Rand, Journal of Economics. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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This article uncovers an unnoticed connection between exclusive contracts and vertical organization. A vertically integrated firm can use exclusive dealing to foreclose an equally efficient upstream competitor and to cartelize the downstream industry. Neither vertical integration nor exclusive dealing alone achieves these anticompetitive effects. The cartelization effect of these two practices may be limited when downstream firms are heterogeneous and supply contracts are not contingent on uncertain market conditions. The extent of cartelization also depends on the degree of downstream market concentration and on the degree to which downstream competition is localized.
1. ...
<[infinity]. The corresponding probability density function is f(v)><1/2, D1 has the advantage, and Bertrand competition means that D1 wins the competition by setting its price either at its monopoly level or at the marginal cost of D2, whichever is less. When x><1/2. The markup also raises U1-D1's opportunity cost, creating an incentive for D1 to raise its prices and become less of a competitive constraint on D2 when x [greater than or equal to] 1/2 and [P.sup.m.sub.2](x, [??])><0, in compensation for [??]> <[??]. Suppose to the contrary that [P.sup.m.sub.1](0) - r [greater than or equal to] [??]. Then [P.sup.m.sub.1](0)><1, which would lead to a higher expected industry profit than under [??] [less than or equal to] [P.sup.m.sub.1](0) - [tau]. This implies that it cannot be optimal for U1 to offer [??] [less than or equal to] [P.sup.m.sub.1](0) - [tau]; and therefore [??]>
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