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

This paper looks at the reasons for and results of vertical integration, with specific regard to its possible effects on market power as proposed in the theoretical literature on foreclosure. It uses a rich plant-level data set of cement and ready-mixed concrete producers that spans several decades to perform a detailed case study. There is little evidence that vertical foreclosure effects are 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 as has been documented elsewhere, are also larger, more likely to grow and survive, and charge lower prices. We find evidence that integrated producers’ productivity advantage is tied to the fact that they benefit from improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not tied to firms’ vertical structure per se: non-vertical firms with large local concrete operations have similarly high productivity levels.