Vertical Integration, Tying, and Antitrust Policy.

Monopolist selling to a competitively structured downstream industry cannot reap the full monopoly rents available in the final product market when substitution possibilities are present in the final goods production function. As a result, intermediate product monopolists have been shown to have an incentive to integrate downstream, possibly engaging in a price-cost squeeze of the final good producers in an attempt to extend the monopoly to the terminal stage of production and obtain the maximum profits available in the industry under the cost and demand conditions extant. The upstream monopolist could obtain identical results by tying the purchase of nonmonopolized substitutable inputs to the purchase of the intermediate product over which the monopolist exercises control. If this proposition is true, then an intermediate-product monopolist has an alternative to the strategy of vertical integration which may be employed in circumstances where ownership integration is either infeasible or unattractive. More importantly, this proposition implies a previously unrecognized symmetry between the economic effects of tying and vertical integration, which in turn raises serious questions regarding the divergent treatment afforded by these alternative strategies under existing antitrust laws.