Competitive Effects of Vertical Integration

My purpose in this essay is to review the economics literature on the competitive effects of vertical integration, and assess its relevance for competition policy and industry regulation. Section II organizes my literature review around five major theories, after discussing some preliminary issues. The theories depend on assumptions both about the market power of firms to raise prices above costs and to exclude competitors, and about the power of contracts to control and align the incentives of parties. Section III examines the relevance of these and related theories in the context of three recent cases. Section IV outlines a simple framework for the economic analysis of the competitive effects of vertical integration, based on a more elaborate framework in Riordan and Salop (1995). The simple framework is explained with reference to the three cases introduced in the previous section. Section V concludes with some general comments about the state of economic knowledge regarding the competitive effects of vertical integration.