The strategic value of partial vertical integration

We investigate the strategic incentives for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when the retailers privately know their costs and engage in differentiated good price competition. The partial misalignment between the profit objectives within a partially integrated manufacturer-retailer hierarchy entails a higher retail price than under full integration. This “information vertical effect”translates into a “competition horizontal effect”: the partially integrated hierarchy’s commitment to a higher retail price induces the competitor to increase its price, which strategically relaxes competition. Our analysis provides theoretical support for the recently documented empirical evidence on partial equity holdings.