Considering the relation between downstream firms' strategies of product differentiation and vertical relation, we develop an equilibrium theory of vertical merger that incorporates strategic behaviors in the Hotelling type location model. We show that vertical integration enhances the degree of the product differentiation concerning with the integrated firm. Under some condition, a partial integration appears in equilibrium and then the profit of the non-integrated downstream firm may be enhanced by the partial integration.
(2004.09.01)