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Vertical Control with Variable Proportions

If a monopolized input can be used in variable proportions, vertical integration or an equivalent tying arrangement will increase monopoly profits. Assuming a constant elasticity of final demand and a constantelasticity-of-substitution production function for the final product, this paper uses a combination of analytic and simulation techniques to show that vertical control will also reduce the demand for nonmonopolized inputs and, except under particular cost conditions in the input industries, will result in an increase in the price of the final product. The direction of the combined welfare effect, however, depends on the specific parameter values.