ABSTRACT
This chapter examines the theoretical effects of vertical integration and vertical relationships between independent firms, with an emphasis on the conduct and performance implications of vertical relationships. It shows that vertical integration and vertical relationships have a positive economic impact because they solve several potential economic problems. The problems of double marginalization and insufficient promotional services, vertical integration and vertical restraints can solve problems associated with inefficient input substitution. The chapter also examines the potential problems associated with vertical integration and vertical relationships. The existence of significant vertical integration may make it necessary to enter an industry at more than one vertical stage, thereby increasing capital barriers to entry. The chapter focuses on public policy that encourages as much vertical integration as possible where successive market power exists. Public policy toward the four most common types of vertical restraints is explored, including tying agreements, exclusive dealing agreements, territorial and customer restrictions, and RPM.
