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Abstract:

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CEP Discussion Paper
Vertical Integration and Foreclosure: Evidence from Production Network Data
Johannes Boehm and Jan Sonntag
August 2019
Paper No' CEPDP1641:
Full Paper (pdf)

JEL Classification: L14; L42


Tags: mergers and acquisitions; market foreclosure; vertical integration; production networks

This paper studies the prevalence of vertical market foreclosure using a novel dataset on U.S. and international buyer-seller relationships, and across a large range of industries. We find that relationships are more likely to break when suppliers vertically integrate with one of the buyers' competitors than when they vertically integrate with an unrelated firm. This relationship holds for both domestic and cross-border mergers, and for domestic and international relationships. It also holds when instrumenting mergers using exogenous downward pressure on the supplier's stock prices, suggesting that reverse causality is unlikely to explain the result. In contrast, the relationship vanishes when using rumoured or announced but not completed integration events. Firms experience a substantial drop in sales when one of their suppliers integrates with one of their competitors. This sales drop is mitigated if the firm has alternative suppliers in place.