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Equilibrium structures in vertical oligopoly

By Masahiro Abiru, Babu Nahata, Subhashis Raychaudhuri and Michael Waterson

Abstract

The central purpose of this paper is to examine vertical integration as an equilibrium phenomenon. We model it as integration between Cournot oligopolists in both the upstream and the downstream stages. We consider the issue of private profitability versus collective profitability and show that under several situations the equilibrium outcomes may result in a Prisoner's dilemma. The analysis is extended to consider equilibrium outcomes in a dynamic setting, where we find no integration to be a relatively common outcome.

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