Cross‐Market Integration and Sabotage

Abstract

Sabotage activities often raise controversies and regulatory concerns due to the potential negative effects on competition and social welfare. These concerns are amplified when firms serving complementary markets integrate due to the integrated firm’s capability to engage in multi‐market sabotage. We note that the integrated firm’s incentive to engage in sabotage activities and the potential impact on social welfare has not been examined, and this drives the primary focus of our study. Interestingly, we find that the integrated firm may not have the incentive to engage in sabotage at all. We show that the integrated firm prefers to engage in sabotage (single‐market or multi‐market) only when it has cost advantages over its rivals in at least one of the markets. At the extreme, a certain level of sabotage actions could even force some product combinations out of the market and thus, there might be a need for regulatory intervention. A counter‐intuitive result is that under certain market conditions, the integrated firm’s sabotage activities correspond to those that would optimize social welfare.