Strategy in the Presence of Activists: Vertical Integration and Foreclosure

We study how firms' incentives for vertical integration change in the presence of activists. We find that for monopolist targets, it is cheaper for the activist to target a non-integrated firm than a vertically integrated one. Introducing competition between potential targets, we find that activists may prefer to target the vertically integrated firm even if we allow for endogeneous vertical mergers. We also identify conditions under which ineffective boycotts can arise. Finally, we investigate how strategies of vertical foreclosure can be supported when the activist targets a firm's value chain.