We discuss vertical mergers, which occur when two firms at different levels of the supply chain consolidate to become one firm. Vertical mergers can provide procompetitive benefits when they decrease transaction costs, such as those incurred in market exchange, and eliminate double marginalization. These mergers, however, may increase a firm’s market power, which could lead to raising rivals’ costs or market foreclosure. In this chapter, we provide a comprehensive theory of vertical integration. We also discuss mergers that involve suppliers of complementary goods.

This review essay was original published in the Journal of Bioeconomics in March, 2012. It was initiated by Ulrich Witt, Professor of Economics and Director of the Evolutionary Economics Group at the Max Planck Institute in Jena, Germany. He asked me to write a review of The Darwin Economy: Liberty, Competition, and the Common Good (Princeton University Press) by the economist Robert H. Frank, to which Frank would reply. It was an intense but constructive exchange on some of the most important political and economic issues of our time, most notably solving the “collective action” problem of getting selfish actors in a social system (i.e., each of us individually) to forego what is good for us in the short term for what is good for all of us in the long term.

In 1960, the Thomas Jefferson Center of the University of Virginia applied for a “massive” grant from the Ford Foundation. Although Buchanan, Nutter, and Coase had all received grants from Ford, it turned down their proposal because of the Center’s unified “point of view.” The chapter examines correspondence and private discussions of the events. Following the submission of their proposal, Buchanan, Nutter, and then-President of UVA Edgar Shannon met with representatives of the Ford Foundation, Tom Carroll and Kermit Gordon. Buchanan concluded that the “reaction of the Ford representatives must be considered to have been almost wholly negative.” The crux of the matter, in Gordon’s assessment, was the TJC’s supposed “single” and dogmatic “point of view,” an ideological perspective purportedly in line with early 1960s Chicago-style economics. Buchanan and his colleagues attempted to dispel this conclusion, arguing that the program focused on market activity as it reflected social consensus. Coase was particularly incensed by allegations of dogmatic ideological narrowness since he had close ties to the socialist Fabian Society.