Integration and entry decisions of a vertically integrated foreign firm

Abstract

Abstract This study constructs a vertical structure model in which domestic upstream and downstream firms compete with an integrated foreign firm in each market, and compares the entry decisions of the foreign firm under vertical separation and integration between domestic firms. We show that a foreign firm will switch its entry decisions in both upstream and downstream markets depending on separation and integration, which also affects the supply decision of the integrated domestic firm. We also demonstrate that the entry decision under separation is socially beneficial only when the foreign firm enters the final goods market, while entry under integration is never socially beneficial. Finally, we find that integration decreases welfare when the number of downstream firms’ ex-post integration is sufficiently small or large. JEL Classification L32 · L52 · D43 · H44