The strategic value of partial vertical integration

We investigate the incentive for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when the retailers are privately informed about their production costs and engage in differentiated good price competition. Partial vertical integration entails an 'information vertical effect': the partial misalignment of profit objectives within a partially integrated manufacturer-retailer hierarchy involves costs from asymmetric information that reduce the hierarchy's profitability. This translates into an opposite 'competition horizontal effect': the partially integrated hierarchy commits to a higher retail price than under full integration, which strategically relaxes competition. The equilibrium degree of vertical integration trades off the benefits of softer competition against the informational costs.