ON THE CONSUMER WELFARE EFFECT OF VERTICAL INTEGRATION: A GENERALIZATION AND SIMPLIFICATION FOR THE CES CASE

Within the vertical integration literature, it is a long standing proposition that the market level price of a downstream product is invariant with respect to the vertical integration and subsequent monopolization of that downstream industry by a lone input monopolist, given that the downstream production process is a fixed proportions technology and that there is competition in all related relevant industries. Consequently, it has been argued that the consumer welfare effects of permitting integration and monopolization by the upstream monopolist are inconsequential. It is also well known that this vertical integration and downstream monopolization will not result in either a greater or a lesser total profit for the lone input monopolist. Thus, it is also argued that there is no incentive for the monopolist to integrate into the downstream industry and monopolize it, given the presence of the fixed proportions technology.