A bargaining perspective on vertical integration

We analyze vertical integration incentives in a bilaterally duopolistic industry with bargaining in the input market. Vertical integration incentives are a combination of horizontal integration incentives upstream and downstream and depend on the strength of substitutability and complementarity and the shape of the unit cost function. Under particular circumstances, vertical integration can convey more bargaining power to the merged entity than a horizontal merger to monopoly. In a bidding game for an exogenously determined target firm, a vertical merger can dominate a horizontal one, while pre-emption does not occur.