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Downstream Investment in Oligopoly


Buehler, Stefan; Schmutzler, Armin (2003). Downstream Investment in Oligopoly. Working paper series / Socioeconomic Institute No. 310, University of Zurich.

Abstract

We examine cost-reducing investment in vertically-related oligopolies, where firms may be vertically integrated or separated. Analyzing a standard linear Cournot model, we show that: (i) Integrated firms invest more than separated competitors. (ii) Vertical integration increases own investment and decreases competitor investment. (iii) Firms may integrate strategically so as to preempt investments by competitors. Adopting a reduced-form approach, we identify demand/mark-up complementarities in the product market as the driving force for these results. We show that our results generalize naturally beyond the Cournot example, and we discuss policy implications.

Abstract

We examine cost-reducing investment in vertically-related oligopolies, where firms may be vertically integrated or separated. Analyzing a standard linear Cournot model, we show that: (i) Integrated firms invest more than separated competitors. (ii) Vertical integration increases own investment and decreases competitor investment. (iii) Firms may integrate strategically so as to preempt investments by competitors. Adopting a reduced-form approach, we identify demand/mark-up complementarities in the product market as the driving force for these results. We show that our results generalize naturally beyond the Cournot example, and we discuss policy implications.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Socioeconomic Institute (former)
Dewey Decimal Classification:330 Economics
JEL Classification:L13, L22, L40, L82
Language:English
Date:September 2003
Deposited On:29 Nov 2011 22:32
Last Modified:12 Aug 2017 12:59
Series Name:Working paper series / Socioeconomic Institute
Official URL:http://www.econ.uzh.ch/wp.html

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