VERTICAL VS HORIZONTAL INTEGRATION - PREEMPTIVE MERGING (VOL 43, PG 323, 1995)

Eric Avenel has pointed out to me that my proposition 1 (Colangelo [19 95, p. 329]) holds only if goods are not very close complements (gamma > -0.85). In fact, if goods are very close complements, both bidders prefer to see their rival integrating rather than integrating themselv es, and both prefer the situation with an integration in which they ar e not involved to no integration at all. It is possible to check that for gamma less than or equal to -0.85, pi(U,m) > pi(v) > pi(U) and pi( D,v) > pi(D)(m) > pi(D). Hence there are two equilibria: one in which the upstream bidder bids a strictly positive epsilon while the downstr eam bidder bids zero (vertical integration takes place); the other in which the upstream bidder bids zero while the downstream bidder bids a strictly positive epsilon (horizontal integration takes place). Both types of integration are thus possible for gamma less than or equal to -0.85. The essence of the conclusions reached in the paper remains un changed.