The central purpose of this paper is to examine firms' vertical integration decisions as a consequence of strategic choices within an explicit market environment. I show that a unique equilibrium number of unintegrated downstream firms exists when the intermediate-good market is imperfectly...

The paper examines the welfare effects of the development of an intermediate market. For this purpose I develop a model where such a market may arise endogenously. If integrated and unintegrated firms coexist in equilibrium, consumers do not benefit from the emergence of an intermediate market....