BPEA | 1990: Microeconomics

Vertical Integration and Market Foreclosure

Jean Tirole and
Jean Tirole Massachusetts Institute of Technology
Oliver Hart

Microeconomics 1990

FEW PEOPLE would disagree that horizontal mergers have the potential to restrict output and raise consumer prices, but there is much less agreement about the anticompetitive effects of vertical mergers. Some commentators have argued that a purely vertical merger will not affect a firm’s monopoly power, because the merger of an upstream and a downstream firm, each of which controls, say, 10 percent of its market, does not change market shares: other firms continue to possess 90 percent of each market. Other commentators have responded by developing models in which vertical integration can lead to the foreclosure of competition in upstream or downstream markets. These models, however, rely on particular assumptions about contractual arrangements between nonintegrated firms (for example, that pricing must be linear) or about the ability of integrated firms to make commitments (for example, that an integrated supplier can commit not to undercut a rival). Thus at this stage the debate about the conditions under which vertical mergers are anticompetitive is far from settled.