This paper derives a model of vertical integration when it is difficult to write binding long-term supply price contracts. Thus, a vertically separated monopolist is vulnerable to hold-up. Without integration, we demonstrate that a bottleneck monopolist has an incentive to encourage more firms...

This paper reconsiders the result of Stole and Zwiebel (1996) that when a firm bargains with its workers over the wages in non-binding contracts, the firm will over-employ workers to reduce the hold-up power of any one. This result has stood in contrast to conclusions drawn in the literature on...