This paper examines an integrated firm’s incentive to undertake vertical separation with forward-looking behavior. In an infinitely repeated game we show that tacit collusion among firms in a final good market is more likely to be sustained under vertical separation than under vertical integration. The integrated firm tends to vertically separate its business if the discount factor is
at a medium level and the input price is sufficiently low. Finally, an increase in the input price is socially beneficial if it prevents vertical separation.