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Unformatted text preview: • The ﬁnal impact of integration on ﬁrm proﬁts depends on two forces:
1. A negative competition effect: Integration leads to an immediate increase in the
total number of ﬁrms in the market, which has a negative effect on proﬁts.
2. A positive market size effect: Integration leads to an immediate increase in the size
of the market, which raises the demand elasticity of every ﬁrm.
• To take advantage of a larger market size, ﬁrms must reduce their price.
• But the ability of ﬁrms to reduce price varies across ﬁrms - high productivity ﬁrms can
reduce their prices by large amounts since they had large mark-ups before integration;
low productivity ﬁrms cannot reduce their prices by too much since then their markups
will become negative. 1 ...
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- Spring '10