A Simple Model of Anticompetitive Vertical Integration

Abstract

The result of neutrality of vertical integration for competition postulated by the Chicago School can be supported by a benchmark model with (1) an upstream monopolist, (2) homogeneous goods downstream and (3) observable (two-part tariff) contracts. The result does not hold however, whenever any of the three assumptions is relaxed. In this paper we show first, that in presence of an alternative supply, vertical integration is profitable and leads to anticompetitive market foreclosure; second, under product differentiation, inefficient alternative supplies make vertical integration welfare improving, whereas it is profitable only for\ efficient enough second source supplies. As a consequence, a clear prescription for antitrust emerges: we should not allow for vertical integration.