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Digging Deep to Compete: Vertical Integration, Product Market Competition and Prices
Author(s) -
McGowan Danny
Publication year - 2017
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/joie.12157
Subject(s) - vertical integration , competition (biology) , counterfactual thinking , incentive , product market , industrial organization , product (mathematics) , market integration , economics , exploit , business , microeconomics , ecology , computer science , mathematics , philosophy , geometry , computer security , epistemology , biology
This article establishes a causal effect of product market competition on vertical integration. I exploit a hitherto unexplored natural experiment in the U.S. coal mining industry and a unique mine‐level organizational data set. Following an exogenous increase in product market competition, the incidence of vertical integration fell by 33% within the treatment group relative to the counterfactual. I find novel evidence that transition to the lower degree of vertical integration is driven by competition's reducing market prices by 32% which decreased the incentive to conduct vertical mergers. I discuss several possible interpretations of these changes.