Digging Deep to Compete : Vertical Integration, Product Market Competition and Prices

This paper tests whether product market competition affects vertical integration through the price channel. The identification strategy exploits data on ownership structure and deregulation of the US railroad sector as a source of exogenous variation in competition within the coal mining industry. We document a 28% reduction in the incidence of vertical integration among the treatment group following exposure to more product market competition. Consistent with recent organizational economics theories, this effect stems from product market competition increasing industry supply and reducing market prices. This decreased the returns to integration and triggered a significant reduction in the frequency of mergers