Chapter 9: Vertical Integration and Vertical Mergers
I Introduction Our major concern in part II (Chapters 4–8) was the antitrust issues raised by horizontal dominance, whether this came from a single firm or a group of firms acting overtly or covertly together. In this chapter and the next we discuss vertical dominance, that is, the possibility that a firm having market power at one stage of the production process may, by one means or another, increase its market power and hence its profits by operating in other, related production stages. Most finished products in the modern economy go through a number of ‘production’ stages. What starts out as a collection of raw materials may have to go through a whole series of successive refining, manufacturing and distribution stages before it ends up in the retail showroom or store. The number of different stages and the degree to which a product is processed or refined at any one of them will vary from product to product. Some, such as fresh fruit and vegetables, may pass through few vertical stages, although in the case of those flown halfway across the world even this may need to be modified. Others, such as motor cars, drawing on a multiplicity of different materials often manufactured by independent firms, may involve many separate stages. It will help in what follows if we abstract from this real-world complexity and think of a production process having just three vertical stages: raw material extraction, manufacturing and distribution. Vertical integration occurs when a producer at one...
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