This paper gives conditions under which vertical separation is chosen by some upstream firms, while vertical integration is chosen by others in the equilibrium of a symmetric model. A vertically separating firm trades off fixed contracting costs against the strategic benefit of writing a (two-part tariff, exclusive dealing) contract with its retailer. Coexistence emerges when more than two vertical Cournot oligopolists supply close substitutes. When vertical integration and separation coexist, welfare could be improved by reducing the number of vertically separating firms. The scope for coexistence diminishes when assumptions on contract observability and commitment are relaxed.
International Journal of Industrial Organization, 2003, Vol 21, Issue 5, p. 699-716