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Vertical integration and foreclosure: evidence from production network data

Boehm, Johannes and Sonntag, Jan (2019) Vertical integration and foreclosure: evidence from production network data. CEP Discussion Papers. Centre for Economic Performance, LSE, London, UK.

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Abstract

This paper studies the prevalence of vertical market foreclosure using a novel dataset on U.S. and international buyer-seller relationships, and across a large range of industries. We find that relationships are more likely to break when suppliers vertically integrate with one of the buyers' competitors than when they vertically integrate with an unrelated firm. This relationship holds for both domestic and cross-border mergers, and for domestic and international relationships. It also holds when instrumenting mergers using exogenous downward pressure on the supplier's stock prices, suggesting that reverse causality is unlikely to explain the result. In contrast, the relationship vanishes when using rumoured or announced but not completed integration events. Firms experience a substantial drop in sales when one of their suppliers integrates with one of their competitors. This sales drop is mitigated if the firm has alternative suppliers in place.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information: © 2019 The Authors
Divisions: LSE
Subjects: H Social Sciences > HB Economic Theory
JEL classification: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships; Contracts and Reputation; Networks
L - Industrial Organization > L4 - Antitrust Issues and Policies > L42 - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
Date Deposited: 14 Feb 2020 14:45
Last Modified: 12 Sep 2020 23:14
URI: http://eprints.lse.ac.uk/id/eprint/103401

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