Single monopoly profits, vertical mergers, and downstream foreclosure

Abstract

We review the Chicago school's single monopoly profit theory whereby an upstream monopolist cannot increase its profits through vertical integration as it anyway has sufficient market power. In our model the dominant supplier has full bargaining power, uses observable two-part tariffs, and is only constrained by a less efficient source (such as in-house production). We show that, by vertically integrating with a downstream incumbent, the supplier can profitably commit to pricing more aggressively if a downstream entrant refuses its supply contract. This can foreclose the downstream market. The anti-competitive effects arise from the seemingly pro-competitive elimination of double marginalization.