Vertical Integration of Successive Oligopolists

Abstract

Vertical integration of successive monopolists (with fixed production coefficients) has long been known to provide merging monopolists with greater profit and their customers with greater outputs at lower prices. We contended in our earlier papers that similar welfare attributes apply to mergers between monopolist input suppliers and Cournot-type oligopolists.1 But what is the result when the input supplier is also an oligopolist? The present paper answers this question. It demonstrates, in particular, that when vertical integration of successive oligopolists is mutually profitable, industry output increases and product price is lowered. The welfare gain stemming from vertical integration is further shown to hold not only under Cournot oligopoly but a Stackelberg leader-follower type of oligopoly. I. Independent Upstream-Downstream Oligopolists

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