Premium
Vertical Enclosure: Vertical Integration and the Reluctance to Purchase from a Competitor
Author(s) -
Lee Heavner D.
Publication year - 2004
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.0022-1821.2004.00222.x
Subject(s) - vertical integration , commit , competitor analysis , monopoly , industrial organization , quality (philosophy) , business , downstream (manufacturing) , purchasing , competition (biology) , market power , economics , microeconomics , marketing , computer science , ecology , philosophy , epistemology , database , biology
Vertical integration can reduce integrating firms' trading opportunities and, contrary to predictions of two‐firm models, this loss of trade can make integration unprofitable. If downstream units must commit to suppliers before contracting on the final terms of trade, then suppliers will have ex‐post monopoly power. This monopoly power reduces the quality that an integrated supplier will provide to its competitors. Expectations of this quality reduction can prevent firms from purchasing from an integrated supplier even though the supplier would be better off if it could commit to provide its downstream competitors with sufficient quality to retain their business.