Vertical integration and input foreclosure in the Hotelling model of horizontal differentiation

We present a simple model describing the relationship between two main effects of vertical integration - raising rivals' costs (RRC) and elimination of double marginalization (EDM) - in a differentiated product setting. We find that RRC and EDM are intrinsically linked: the same force creates an incentive for the merged firm to foreclose rivals and to reduce downstream prices. Importantly, this is so, even if there is no overall output expansion effect (i.e. no new customers enter the market post-merger that were not already served pre-merger). We also discuss the practical implications of our findings in light of the current analytical framework used by the European Commission to analyze vertical mergers