Intimidating Competitors–Endogenous Vertical Integration and Downstream Investment in Succesive Oligopoly

Armin Schmutzler, University of Zurich
Stefan Bühler, University of Zurich

Abstract

This paper examines the interplay of endogenous vertical integration and cost-reducing downstream investment in successive oligopoly. Analyzing a linear Cournot model, we establish the following key results: (i) Vertical integration increases own investment and decreases competitor investment (intimidation effect). (ii) Asymmetric integration is a non-degenerate equilibrium outcome. (iii) Compared to a benchmark model without investment, complete vertical separation is a less likely outcome. We argue that these findings generalize beyond the linear Cournot model under reasonable assumptions.