Article

Vertical Integration as a Source of Hold-up

Marie-Laure Allain, Patrick Rey, and Claire Chambolle

Abstract

While vertical integration is traditionally seen as a solution to the hold-up problem, this paper highlights instead that it can generate hold-up problems — for rivals. We first consider a successive duopoly where competition among suppliers eliminates any risk of hold-up; downstreamfirms thus obtain the full return from their investments. We then show that vertical integration creates hold-up concerns for the downstream rival, by affecting the integrated supplier’s incentives from both ex ante and ex post standpoints. We also provide illustrations in terms of standard industrial organization models and of antitrust cases, and discuss the robustness of the insights.

Keywords

Vertical Integration; Hold-up; Incomplete contracts; Vertical foreclosure;

JEL codes

  • L13: Oligopoly and Other Imperfect Markets
  • L41: Monopolization • Horizontal Anticompetitive Practices
  • L42: Vertical Restraints • Resale Price Maintenance • Quantity Discounts

Replaces

Marie-Laure Allain, Patrick Rey, and Claire Chambolle, Vertical Integration as a Source of Hold-up, TSE Working Paper, n. 14-525, September 2014.

Published in

The Review of Economic Studies, vol. 83, n. 1, January 2016, pp. 1–25