This paper presents the development of an equilibrium theory of vertical merger that incorporates strategic behaviors in the Hotelling-type location model for the purpose of considering the relationship between the strategies of downstream firms for product differentiation and vertical integration. I show that vertical integration enhances the degree of product differentiation of the integrated firm. Under some conditions, partial integration appears to be in equilibrium and may increase the profit of the non-integrated downstream firm. Welfare implications of vertical integration are briefly discussed.
JEL classification numbers: D43, L13, L22, R32
Key words: product differentiation, vertical integration, location model, foreclosure