Vertical Integration and Foreclosure: Evidence from Production Network Data

Abstract

This paper studies the prevalence of potential anticompetitive effects of vertical mergers using a novel data set on U.S. and international buyer-seller relationships and across a large range of industries. We find that relationships are more likely to break when suppliers vertically integrate with one of the buyers’ competitors than when they vertically integrate with an unrelated firm. This relationship holds for both domestic and cross-border mergers and for domestic and international relationships. It also holds when instrumenting mergers using exogenous downward pressure on the supplier’s stock prices, suggesting that reverse causality is unlikely to explain the result. In contrast, the relationship vanishes when using rumored or announced but not completed integration events. Firms experience a substantial drop in sales when one of their suppliers integrates with one of their competitors. This sales drop is mitigated if the firm has alternative suppliers in place. These findings are consistent with anticompetitive effects of vertical mergers, such as vertical foreclosure, rising input costs for rivals, or self-foreclosure. This paper was accepted by Joshua Gans, business strategy.

Electoral Violence and Supply Chain Disruptions in Kenya's Floriculture Industry

“…Our results suggest that incentives associated with stable relationships in nontraditional agriculture encouraged firms to quickly respond to the violence. 22 Stable relationships might be associated with higher exporters' margins (see Cajal-Grossi et al, 2019) but can also lead to foreclosure and less competitive conduct (see, e.g., Boehm and Sonntag, 2020). While this study does not provide a comprehensive evaluation of the social benefits of such export arrangements, it provides a novel rationale for why policy makers in countries prone to instability might promote the adoption of such arrangements among exporters.…”

Electoral Violence and Supply Chain Disruptions in Kenya's Floriculture Industry

“…Our results suggest that incentives associated with stable relationships in nontraditional agriculture encouraged firms to quickly respond to the violence. 20 Stable relationships might be associated with higher exporters' margins (see Cajal-Grossi et al (2019)) but can also lead to foreclosure and less competitive conduct (see, e.g., Boehm and Sonntag (2020)). While this study does not provide a comprehensive evaluation of the social benefits of such export arrangements, it provides a novel rationale for why policy makers in countries prone to instability might promote the adoption of such arrangements among exporters.…”

The Impact of Vertical Theories of Harm on Investor Returns: An Event Study of US Vertical Mergers

“…Using this measure, he finds that targets gain only modestly relative to acquirers. 2018), Wan and Sanders (2017), Koch et al (2020), Yang (2020), Boehm and Sonntag (2021). Chatterjee (1991) built on prior research to examine how investor expectations for vertical mergers vary with market concentration.…”

“…•Returns to rivals to be lower in vertical mergers Kedia et al (2011) •Abnormal returns are higher for rivals in vertical mergers, Shenoy (2012) •Acquirers gain slightly relative to targets in vertical mergers Ahern (2012) Baker et al (2014) •Vertically integrated theaters charged lower prices and sold more admission tickets than nonintegrated theaters Gil (2015) •Vertically integrated video games have higher sales and prices than independent games due to higher quality and better release strategies. Gil and Warzynski (2015) • Vertical integration between regional sports networks and programming distributors increases consumer and total welfare •Supplier relationships are more likely to dissolve when a supplier vertically integrates with the buyer's competitor Boehm and Sonntag (2021) increase in market share of hopsitals integrated with physicians increased prices In recent years, there has been a heightened interest in studying vertical mergers in particular segments. Baker et al (2014) investigated the impact of vertical integration on hospital prices, volumes (admissions), and spending for privately insured patients.…”

“…Figure 2. Studies assessing the relative gains in and effects from vertical mergers, including Chatterjee(1991),Fan and Goyal (2006),Kedia et al (2011),Shenoy (2012),Ahern (2012),Baker et al (2014),Gil (2015),Gil and Warzynski (2015),Crawford et al (2018),Hosken and Taylor (2020),Baker et al (2020),Cuesta et al (2019),Capps et al (2018),Wan and Sanders (2017),Koch et al (2020), Yang (2020),Boehm and Sonntag (2021).…”