The strategic value of partial vertical integration

Abstract

We investigate the strategic incentives for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when retailers privately know their costs and engage in differentiated good price competition. The partial misalignment between the profit objectives within a partially integrated manufacturer-retailer hierarchy entails a higher retail price than under full integration. This 'information vertical effect' translates into an opposite 'competition horizontal effect': the partially integrated hierarchy's commitment to a higher price induces the competitor to increase its price, which strategically relaxes competition. Our analysis provides implications for vertical merger policy and theoretical support for the recently documented empirical evidence on partial vertical acquisitions.

A Supply-Lock Competitive Market for Investable Products

“…Many studies have examined various aspects of market structures and how structure itself explains organizational behavior and asset price (Anania and Scoppola, 2014;Braido and Shalders, 2015). Recent studies of market structures tend to focus on market integration and strategic interactions (Eső et al, 2010;Ghossoub et al, 2013;Legros and Newman, 2013;Fiocco, 2016). For example, explaining how market structure influences monetary policy, Ghossoub et al (2013) suggest that a higher growth rate of monetary brings about a lower rate of interest and a many transactions of lending behavior under a perfect competition scenario.…”

Optimal Decision-Making of Vertical Relationship Governance in China’s Coal-electricity Energy Supply Chain

“…Peng et al discusses the establishment of cooperative relationship between coal suppliers and power companies to solve conflicts [6]. Studies the mixture of vertical integration and vertical separation, points out the coexistence of vertical integration and vertical separation in the market [7,8]. Many scholars explore the application of vertical integration and vertical separation models.…”

Separation versus Affiliation with Partial Vertical Ownership in Network Industries

“…In the case of vertically-related industries, Fiocco (2016) studies partial vertical ownership in successive duopolies with secret retailer costs leading to price increase and competition relaxation. Wadeson (2017) considers the incentives for an upstream supplier to fully integrate one of its price-taker dealers, however partial integration is not allowed.…”

“…There are regulatory ownership thresholds (typically at the 5%, 10%, 20% and 30% levels) and publicly traded companies are required to disclose when they cross these thresholds. For instance, the 2010 US horizontal merger guidelines introduce a section on partial acquisitions (Fiocco, 2016).…”