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Vertical integration and product differentiation

Zanchettin, Piercarlo; Mukherjee, Arijit

Authors

Piercarlo Zanchettin

Arijit Mukherjee



Abstract

We study a new channel of downstream rent extraction through vertical integration: competition for integration. Innovative downstream firms create value and profit opportunities through product differentiation, which however affects an upstream monopolist’s incentive to vertically integrate. By playing the downstream firms against each other for integration, the upstream firm can extract even more than the additional profits generated by the downstream firms’ differentiation activities. To preempt rent extraction, the downstream firms may then reduce differentiation, which reduces social welfare. We show that this social cost of vertical integration is more likely to arise in innovative and competitive industries, and that the competition for integration channel of downstream rent extraction is robust to upstream competition.

Journal Article Type Article
Journal International Journal of Industrial Organization
Print ISSN 0167-7187
Electronic ISSN 1873-7986
Publisher Elsevier
Peer Reviewed Peer Reviewed
APA6 Citation Zanchettin, P., & Mukherjee, A. (in press). Vertical integration and product differentiation. International Journal of Industrial Organization, doi:10.1016/j.ijindorg.2017.07.004
DOI https://doi.org/10.1016/j.ijindorg.2017.07.004
Keywords Vertical integration; Product differentiation; Rent extraction; Product innovation; Market segmentation
Publisher URL http://www.sciencedirect.com/science/article/pii/S0167718717304137
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Vertical integration-Accepted version- 24 July 2017.pdf (331 Kb)
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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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