Vertical Integration: The Monopsony Case

Backward integration is defined in order to improve the analysis of monopsony, and it is found that complete backward integration eliminates the efficiency losses from monopsonistic behavior. Expanded input employment by the integrated monopsonist results in a greater final output at lower prices for consumers. The author concludes that vertical integration by imperfectly competitive firms can be successfully modeled and analyzed if the concept of vertical integration, full and partial, is well defined and meaningful. The welfare implications of integration on all participants in the industry can be considered and the incentives to integrate can be specified and examined. 10 references.