Dr. Nadav Levy
Interdisciplinary Center (IDC), Herzliya
Partial vertical integration
David Gilo (Tel-Aviv U.), Nadav Levy (IDC Herzliya), and Yossi Spiegel (Tel-Aviv U.)
We study the competitive effects of partial vertical integration, i.e., the acquisition of control by one firm in either an upstream supplier or a downstream buyer with less than 100% of the shares. We find that firms often have incentives to acquire partial rather than full stakes in vertically related firms and that partial acquisitions may often increase the risk of anticompetitive foreclosure of rival buyers and suppliers beyond what is posed by a full vertical integration. The profitability of partial acquisitions depends on the ownership structure of the target firm. Specifically, for a set of initial conditions under which full vertical integration is not profitable, partial acquisition of the supplier by the buyer (partial backward integration) is not profitable as well when supplier has a single owner, but is profitable when the supplier has a controlling shareholder who holds less than 100% of the shares and provided the controller's initial share is not too high. Partial acquisition is yet more profitable when the shares of the supplier are held by a group of dispersed shareholders. We also show that a non-controlling toehold can have a pro-competitive effect in this case.