| Sumario: | This article analyzes the effect on product price of vertical merger between an upstream monopoly seller of a raw material and downstream competitive firms using this input, together with others, to produce a product. Popular wisdom is that such forward extension of monopoly power causes consumer prices to increase. This article develops a general analytical scheme based on production-cost duality. The method does not postulate specific mathematical forms of production or demand functions. The basic idea is to take the price quantity equilibrium configuration of integrated monopoly as starting point. This equilibrium is determined by the demand function for the product and costs for the product generated by a given production function and input prices. Next, consider the alternative nonintegrated vertical industry structure. The author analyzes vertical integration that leads to monopoly in a previously competitive market for the downstream product. Thus one effect of vertical merger is an increase in the price of the final product as a result of monopolization of that market and a new wedge between price and marginal cost.
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