Cooperating upstream while competing downstream: A theory of input joint ventures

Joint ventures in which firms share ownership of a facility that produces an important input have become common. In our model, two parent firms competing in a downstream market set up such a joint venture. We analyze the pricing strategy of the joint venture and the impact of this strategy on downstream competition. We compare the joint venture equilibrium with alternative arrangements in which (a) the two firms merge; and, (b) each firm produces its own input. Among our results, we find that the joint venture can replicate the effects of a full-scale merger of the parents.

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