Managerial Firms , Vertical Integration , and Consumer Welfare ∗

We show that vertical integration decisions of managers may affect adversely consumers even in the absence of monopoly power in either supply or product markets. This effect is most likely to come about when demand is initially high and there is a negative supply shock or when demand is low and there is a positive demand shock. The results are robust to the introduction of active shareholders and to other extensions. ∗PRELIMNARY AND INCOMPLETE. We thank Roland Benabou, Patrick Bolton, and Phil Bond for helpful discussion. Legros benefitted from the financial support of the Communauté Française de Belgique (projects ARC 98/03-221 and ARC00/05-252), and EU TMR Network contract nFMRX-CT98-0203. Newman was the Richard B. Fisher Member of the Institute for Advanced Study, Princeton when much of the research for this paper was conducted. †ECARES, Université Libre de Bruxelles; and CEPR ‡University College London and CEPR