Can vertical integration by a monopsonist harm consumer welfare?

Abstract

Vertical integration by a monopsonist is generally believed not to harm consumers. This paper demonstrates, in a natural economic setting, that this conventional wisdom may not hold. We model one-on-one bargaining between a monopsonist and independent suppliers when the set of suppliers cannot be expanded easily ex post and show that a vertically separated monopolist is vulnerable to holdup. Without integration, we demonstrate that a bottleneck monopsonist has an incentive to encourage more upstream entry than would arise in a pure neoclassical monopoly. Having more suppliers mitigates the holdup power of any one. This, however, distorts the cost structure of the industry toward greater indu..