Vertical Integration and Horizontal Expansion

Abstract: We analyze the relationship between horizontal and verti-cal market structure in vertically related oligopolies. In our reduced-form model, downstream firms can carry out both horizontal invest-ments (process innovations) and vertical investments (acquisitions of upstream firms). Under fairly general conditions, we find that (i) some firms integrate, while others remain separated; (ii) large firms are more likely to integrate vertically, and integrated firms tend to expand more horizontally; and (iii) firms may use vertical integration strategically as a barrier to horizontal expansion. We discuss the implications of our findings for antitrust policy