Analysis on effects of vertical integration

Under some general assumptions, this paper applies tools of theroy of game and differential technology to investigating vertical integration motivations and externalities. The following results are shown: (1) downstream firms have not only the positive motives to engage in vertical integration but also the passive motives to engage in vertical integration in order to avoid the negative externalities put on by other downstream firms's vertical integration. (2) that the vertical integration is procompetitive or anticompetitive depends on whether or not the downstream firm engages in vertical foreclosure. (3) vertical integration of the downstream firm generally enhances profits of upstream firms. (4) Higher is efficiency of the downstream firm engaging in vertical integration, more possibly does the vertical integration enhance social welfare.