Vertical Integration as a Source of Hold-up: an Experiment

Abstract

In a vertical chain in which two rivals invest before contracting with one of two competing suppliers, partial vertical integration may create hold-up problems for the rival. We develop an experiment to test this theoretical prediction in two setups, in which suppliers can either pre-commit ex ante to appropriating part of the joint profit, or degrade ex post the support they provide to their customer. Our experimental results confirm that vertical integration creates hold-up problems in both setups. However, we observe more departures from theory in the second one. Bounded rationality and social preferences provide a rationale for these departures.

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Replaces

Marie-Laure Allain, Claire Chambolle, Patrick Rey, and Sabrina Teyssier, “Vertical Integration as a Source of Hold-up: an Experiment”, TSE Working Paper, n. 20-1062, January 2020.

Reference

Marie-Laure Allain, Patrick Rey, and Sabrina Teyssier, “Vertical Integration as a Source of Hold-up: an Experiment”, European Economic Review, vol. 137, August 2021.