Passive vertical integration and strategic delegation

Abstract

With backward acquisitions in their efficient supplier, downstream firms profitably internalize the effects of their actions on their rivals' sales, while upstream competition is also relaxed. Downstream prices increase with passive, yet decrease with controlling acquisition. Passive acquisition is profitable when controlling acquisition is not. Downstream acquirers strategically abstain from vertical control, thus delegating commitment to the supplier, and with it high input prices, allowing them to charge high downstream prices. The effects of passive backward acquisition are reinforced with the acquisition by several downstream firms in the efficient supplier. The results are sustained when suppliers charge two‐part tariffs.

When is upstream collusion profitable?

“…The question is, would an upstream collusion still be profitable after compensating the downstream? We will focus on this question in the analysis, and ignore a related question of exactly how the compensation is done, as it is straightforward and has been studied in the literature in various forms, such as passive ownership (Hunold and Stahl, ) or transfer pricing with rationing (Schinkel, Tuinstra, and Rüggeberg, ). Consequently, our task is to identify conditions under which an upstream collusion raises the joint profits of the upstream and downstream industries.…”

Partial Vertical Integration, Ownership Structure, and Foreclosure

“…There are only a few papers that consider the competitive effects of partial vertical integration. Riordan (1991), Greenlee and Raskovitch (2006), Choi et al (2014), and Hunold and Stahl (2016) consider passive acquisitions, which affect the competitive strategy of the acquirer, but do not affect the target's strategy as in the case of backward integration in our paper. 8 We are aware of only four papers that consider the acquisition of a controlling stake in a vertically related firm.…”

Passive backward acquisitions and downstream collusion

“…Upstream firms optimally respond to this by increasing their wholesale tariffs in such a manner that strategic choices in the downstream market may remain invariant (Flath (1989); Greenlee and Raskovich (2006)). However, if downstream firms are sufficiently differentiated, a passive acquisition may exacerbate double marginalization since an acquirer profitably internalizes an increase in its competitors' demand resulting from an increase in the own consumer price (Hunold and Stahl (2016)).…”