Incentives for Sabotage in Vertically - Related Industries

We show that the incentives a vertically integrated supplier may have to disadvantage or “sabotage” the activities of downstream rivals vary with both the type of sabotage and the nature of downstream competition. Cost-increasing sabotage is typically profitable under both Cournot and Bertrand competition. In contrast, demand-reducing sabotage is often profitable under Cournot competition, but unprofitable under Bertrand competition. Incentives for sabotage can vary nonmonotonically with the degree of product differentiation. * University of Missouri. ** University of Florida. This research emanated from collaborative discussions with Dennis Weisman. We are grateful to Dennis for his many useful suggestions regarding this paper and our research efforts more generally. We also thank Yossi Spiegel and an anonymous referee for helpful comments. 1. In December 1999, Verizon became the first RBOC to secure permission to provide in-region long distance (i.e., interLATA) service (in New York State). SBC followed suit (in Texas) in June 2000. As of January 1, 2003, the RBOCs had received permission to provide in-region interLATA service in thirty-five states. (http://www.fcc.gov/Bureaus/Common_Carrier/in-region_applications.) 2. Similar concerns led to the divestiture of the Bell System in 1984. See, for example, Faulhaber (1987, p. 84).