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19 - The Economic Theory of Vertical Integration

from Part V - Mergers and Acquisitions

Published online by Cambridge University Press:  24 November 2022

Roger D. Blair ,
Christine Piette Durrance  and
Tirza J. Angerhofer
Roger D. Blair
Affiliation:
University of Florida
Christine Piette Durrance
Affiliation:
University of Wisconsin
Tirza J. Angerhofer
Affiliation:
Duke University, North Carolina
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Summary

We discuss vertical mergers, which occur when two firms at different levels of the supply chain consolidate to become one firm. Vertical mergers can provide procompetitive benefits when they decrease transaction costs, such as those incurred in market exchange, and eliminate double marginalization. These mergers, however, may increase a firm’s market power, which could lead to raising rivals’ costs or market foreclosure. In this chapter, we provide a comprehensive theory of vertical integration. We also discuss mergers that involve suppliers of complementary goods.

Keywords

vertical integrationvertical mergerelimination of double marginalizationRonald Coasetransaction costsraising rivals’ costsmarket foreclosuremergers of complements
Type
Chapter
Information
Antitrust Policy in Health Care Markets , pp. 434 - 456
Publisher: Cambridge University Press
Print publication year: 2022

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References

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