Vertical integration under optimal taxation: a consumer surplus detrimental result

Vertical integration in environments without foreclosure, or more generally without any obstacles that restrict competition in the market, and subsidization of firms are two separate mechanisms that have pro-competitive effects. In this paper we show that subsidization can corrode the positive welfare effects of vertical integration, as the latter induces the government to subsidize firms’ output to a lesser extent. This causes an output reduction that lowers consumer surplus.