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VERTICAL MERGERS, FORECLOSURE AND RAISING RIVALS' COSTS – EXPERIMENTAL EVIDENCE

Authors


  • *The author is grateful to two referees, the Editor, Dirk Engelmann, Wieland Müller, Martin Sefton, Georg Weizsaecker, and seminar audiences at ESA Amsterdam, DIW Berlin, TU Berlin, University of Goettingen, Royal Holloway College London, University of Mannheim, and University of Zurich for useful comments. Thanks also to Volker Benndorf, Nikos Nikiforakis, Holger Rau, Silvia Platoni and Brian Wallace for their help on the research. Financial support through Leverhulme grant F/07537/S is gratefully acknowledged.

Abstract

The hypothesis that vertically integrated firms have an incentive to foreclose the input market because foreclosure raises its downstream rivals' costs is the subject of much controversy in the theoretical industrial organization literature. A powerful argument against this hypothesis is that, absent commitment, such foreclosure cannot occur in Nash equilibrium. The laboratory data reported in this paper provide experimental evidence in favor of the hypothesis. Markets with a vertically integrated firm are significantly less competitive than those where firms are separate. While the experimental results violate the standard equilibrium notion, they are consistent with the quantal-response generalization of Nash equilibrium.

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