Competition, Investment and Vertical Integration
This paper analyses the impact of competition among downstream firms on a supplier's investment and on her incentive to vertically integrate. We argue that tougher competition decreases the downstream industry profit, but improved the supplier's negotiation position. In particular, the supplier is better off encouraging competition when the downstream firms have a high bargaining power. Whether vertical integration occurs with a concentrated or a competitive downstream market depends on the demand and cost curves, the impact of investment and the bargaining game. The possibility of vertical integration may be a barrier to entry and may trigger strategic horizontal spin-offs or mergers.