CONVEX COSTS AND THE INCENTIVE FOR VERTICAL CONTROL

This paper builds on the successive monopoly literature and demonstrat es that fixed proportions technology downstream and inelastic final de mand are not sufficient to eliminate the incentive for vertical contro l. As long as downstream marginal costs increase, the incentive remain s. Moreover, if the downstream firm can influence the convexity of cos ts, a social as well as a private incentive for such control exists. T his results from the ability of a downstream monopolist to increase it s profit on infra-marginal units by choosing a wasteful technology, a technology which the integrated firm avoids.