Upsteam competition with vertically integrated firms

M. Bourreau, J. HOMBERT, J. Pouyet, N. Schutz

Journal of Industrial Economics

December 2011, vol. 59, n°4, pp.677-713

Departments: Finance, GREGHEC (CNRS)

We propose a model of two-tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous input, the Bertrand logic may collapse, and the input may be priced above marginal cost in equilibrium. These partial foreclosure equilibria are more likely to exist when downstream competition is fierce or when unintegrated downstream competitors are relatively inefficient. We discuss the impact of several regulatory tools on the competitiveness of the wholesale market