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Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices

December 2008

Working Paper Number:

CES-08-41

Abstract

This paper empirically investigates the possible market power effects of vertical integration proposed in the theoretical literature on vertical foreclosure. It uses a rich data set of cement and ready-mixed concrete plants that spans several decades to perform a detailed case study. There is little evidence that foreclosure is quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. These patterns are consistent, however, with an alternative efficiency-based mechanism. Namely, higher productivity producers are more likely to vertically integrate and are also larger, more likely to survive, and charge lower prices. We find evidence that integrated producers' productivity advantage is tied to improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not due to firms' vertical structures per se: non-vertical firms with large local concrete operations have similarly high productivity levels.

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profitability, merger, leverage, monopolistic, efficiency, proprietor, metropolitan, economically, profit, advantage, profitable

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Metropolitan Statistical Area, Bureau of Labor Statistics, National Science Foundation, Total Factor Productivity, Labor Productivity, Bureau of Economic Analysis, Federal Trade Commission, University of Chicago, Department of Economics, Chicago Census Research Data Center, Department of Justice, Council of Economic Advisers, Special Sworn Status, Herfindahl Hirschman Index

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