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Vertical Integration and Proprietary Information Transfers
Author(s) -
Hughes John S.,
Kao Jennifer L.
Publication year - 2001
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.2001.00277.x
Subject(s) - upstream (networking) , downstream (manufacturing) , business , vertical integration , information sharing , commission , competition (biology) , industrial organization , welfare , economic surplus , private information retrieval , information asymmetry , social welfare , value (mathematics) , process (computing) , microeconomics , economics , marketing , market economy , finance , telecommunications , computer science , ecology , machine learning , political science , law , biology , computer security , world wide web , operating system
Suppose that rival downstream producers of a final good contract with the same upstream supplier of an input and, in the process, reveal private information. A vertical merger between the upstream supplier and one of the downstream firms may dissipate the information advantage of the remaining downstream firms. The welfare consequences of such a merger and related information sharing depend on the value of information, the benefits of integration apart from information sharing, and the nature of upstream competition. In this paper, conditions are found under which owners of a vertically integrated firm are better off breaking up into independent firms. This result may explain AT&T's recent spinoff of Lucent Technologies. Further results suggest that a prohibition on information transfers, such as that often proposed by the Federal Trade Commission and Department of Justice as a precursor to approving vertical mergers, may actually reduce expected consumer surplus and expected social welfare.