Faculty of Economics and Business Administration Publications Database

Indirect vs. Direct Constraints in Markets with Vertical Integration

Valletti, Tommaso
Volume: 111
Number: 3
Pages: 527 - 546
Month: November
Link External Source: Online Version
Year: 2009
Keywords: Market power; Antitrust; Merchant market

For an assessment of market power on the wholesale (or merchant) market in the presence of vertically integrated firms, we analyze the interaction of direct constraints, arising from competition on the wholesale market, and of indirect constraints, arising from substitution on the retail market. A vertically integrated firm that still participates in the merchant market exerts both direct and indirect constraints. We analyze the factors that determine the importance of indirect constraints. We find that, in contrast to a common presumption, indirect constraints are sometimes more powerful than direct constraints. We furthermore analyze the incentives of integrated firms to still participate in the merchant market, provided that this is technologically feasible.