Group for Research in Decision Analysis

Effects of Vertical Integration from a Dynamic Point of View

Michael Grothe Bielefeld University, Germany

This paper examines the long-run effects of vertical mergers in oligopolistic industries. For this reason, the model uses a non-cooperative differential game for three different vertical structures (no integration, partial integration, full integration). In all three scenarios R&D and production patterns in the corresponding Markov perfect equilibria with linear feedback strategies are considered. Moreover, the model sheds light on the effect of a vertical merger on process innovation and profitability. First, the investment incentive in all three scenarios depends on the vertical structure, degree of competition and spillover. Second, vertical integration is always profitable for the integrating firms, because it eliminates double marginalization, increases the efficiency and investment.