The strategic value of partial vertical integration

Abstract

We investigate the strategic incentives for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when retailers privately know their costs and engage in differentiated good price competition. The partial misalignment between the profit objectives within a partially integrated manufacturer-retailer hierarchy entails a higher retail price than under full integration. This `information vertical effect' translates into an opposite `competition horizontal effect': the partially integrated hierarchy's commitment to a higher price induces the competitor to increase its price, which strategically relaxes competition. Our analysis provides implications for vertical merger policy and theoretical support for the recently documented empirical evidence on partial vertical acquisitions. Keywords: asymmetric information, partial vertical integration, vertical mergers, vertical restraints. JEL Classification: D82, L13, L42.