Equilibrium Vertical Integration with Complementary Input Markets

Abstract

We provide a model to investigate vertical integration decisions. This model assumes that local downstream manufacturers require two inputs to make their final products. One input is produced by a supplier shared by both manufacturers; another is produced by an exclusive supplier for each manufacturer. We show that vertical integration of each downstream firm with its exclusive supplier enhances the input demand for the common supplier, leading to an increase in the common supplier's input price due to the elimination of the double marginalization. Moreover, downstream firms that require a smaller quantity of inputs from the common supplier, for instance, those with efficient production technology or smaller downstream demand, are more likely to vertically integrate because vertical integration yields a smaller increase in input price. Thus, the cause of firm-size heterogeneity is important to consider when investigating the relationship between firm size and the tendency to vertically integrate.

Vertical integration, foreclosure, and productive efficiency

“…Asymmetry in retailers' marginal costs can arise endogenously in a setup with providers of complementary inputs (as in, among others, Laussel, ; Laussel and Van Long, ; Matsushima and Mizuno, ; Hermalin and Katz, ; Reisinger and Tarantino, ).…”

Supply Chain Control: A Theory of Vertical Integration

“…My model shares with Acemoglu, Antràs, and Helpman (2007) the way contractual incompleteness and specific investment are modeled. Moreover, it features complementarity in production technology, echoing works by Laussel (2008), Laussel and Long (2012), Matsushima and Mizuno (2012) and Reisinger and Tarantino (2013).…”

How Does Market Size Affect Vertical Structure When Considering Vertical Coordination? Application to the Railway Industry

“…Although these papers consider downstream competition to derive results for vertical separation, we show that vertical separation is profitable even with only one downstream firm. Exceptions are Laussel (), Matsushima and Mizuno (, ) and Reisinger and Tarantino (), who explicitly incorporate complementary inputs in attempts to examine why vertical integration does not occur. Besides several differences in the setup, the present paper differs from Laussel (), Matsushima and Mizuno (, ) and Reisinger and Tarantino () as our focus is primarily on the relation among vertical separation, market size and the difficulty to reduce operation costs.…”

“…Exceptions are Laussel (), Matsushima and Mizuno (, ) and Reisinger and Tarantino (), who explicitly incorporate complementary inputs in attempts to examine why vertical integration does not occur. Besides several differences in the setup, the present paper differs from Laussel (), Matsushima and Mizuno (, ) and Reisinger and Tarantino () as our focus is primarily on the relation among vertical separation, market size and the difficulty to reduce operation costs. The last factor is not incorporated into the models in Laussel (), Matsushima and Mizuno (, ) and Reisinger and Tarantino ().…”

“…Besides several differences in the setup, the present paper differs from Laussel (), Matsushima and Mizuno (, ) and Reisinger and Tarantino () as our focus is primarily on the relation among vertical separation, market size and the difficulty to reduce operation costs. The last factor is not incorporated into the models in Laussel (), Matsushima and Mizuno (, ) and Reisinger and Tarantino ().…”