Premium
Downstream Competition, Foreclosure, and Vertical Integration
Author(s) -
Chemla Gilles
Publication year - 2003
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.1430-9134.2003.00261.x
Subject(s) - downstream (manufacturing) , upstream (networking) , vertical integration , industrial organization , competition (biology) , business , negotiation , upstream and downstream (dna) , bargaining power , incentive , profit (economics) , microeconomics , economics , marketing , computer science , telecommunications , ecology , political science , law , biology
This paper analyzes the effect of competition among downstream firms on an upstream firm's payoff and on its incentive to integrate vertically when firms in both segments negotiate optimal contracts. We argue that as downstream competition becomes more intense, the upstream firm obtains a larger share of a smaller downstream industry profit. The upstream firm may encourage downstream competition (even excessively) in response to high downstream bargaining power. The option of vertical integration may be a barrier to entry downstream and may trigger strategic horizontal spinoffs or mergers. We extend the analysis to upstream competition.