IDEAS home Printed from https://ideas.repec.org/a/kap/jeczfn/v135y2022i3d10.1007_s00712-021-00759-3.html
   My bibliography  Save this article

Procurement of advanced inputs and welfare-reducing vertical integration

Author

Listed:
  • Chul-Hi Park

    (Chonnam National University)

  • Toshihiro Matsumura

    (The University of Tokyo)

  • Sang-Ho Lee

    (Chonnam National University)

Abstract

This article presents a model in which two downstream firms compete in a differentiated product market and choose whether to adopt new advanced inputs supplied by the monopolist or competitively supplied standard inputs. When the downstream firms are independent of the monopolistic supplier, from the welfare viewpoint, the incentive to adopt the new inputs is insufficient (can be excessive) given that the rival firm does not (does) adopt. When the monopoly supplier and one downstream firm merge, such integration increases the unintegrated downstream firm’s incentive to adopt the new input supplied by the rival, spreading new inputs in the industry. We emphasize the price-increasing effect under the commitment to procure advanced inputs and show that vertical integration can be harmful to welfare despite the increase in product quality and the reduction in the welfare loss due to double marginalization.

Suggested Citation

  • Chul-Hi Park & Toshihiro Matsumura & Sang-Ho Lee, 2022. "Procurement of advanced inputs and welfare-reducing vertical integration," Journal of Economics, Springer, vol. 135(3), pages 255-283, April.
    • Handle: RePEc:kap:jeczfn:v:135:y:2022:i:3:d:10.1007_s00712-021-00759-3
    DOI: 10.1007/s00712-021-00759-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00712-021-00759-3
    File Function: Abstract
    Download Restriction: no
    File URL: https://libkey.io/10.1007/s00712-021-00759-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Lee Sang-Ho & Park Chul-Hi, 2019. "Eco-Firms and the Sequential Adoption of Environmental Corporate Social Responsibility in the Managerial Delegation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(1), pages 1-9, January.
    2. Matthias Hunold & Konrad Stahl, 2016. "Passive vertical integration and strategic delegation," RAND Journal of Economics, RAND Corporation, vol. 47(4), pages 891-913, November.
    3. Kitamura, Hiroshi & Matsushima, Noriaki & Sato, Misato, 2017. "Exclusive contracts and bargaining power," Economics Letters, Elsevier, vol. 151(C), pages 1-3.
    4. Moresi, Serge & Schwartz, Marius, 2017. "Strategic incentives when supplying to rivals with an application to vertical firm structure," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 137-161.
    5. Kosuke Hirose & Sang-ho Lee & Toshihiro Matsumura, 2017. "Environmental corporate social responsibility : A note on the first-mover advantage under price competition," Economics Bulletin, AccessEcon, vol. 37(1), pages 214-221.
    6. Noriaki Matsushima & Cong Pan, 2016. "Strategic Perils of Outsourcing: Sourcing Strategy and Product Positioning," ISER Discussion Paper 0983, Institute of Social and Economic Research, Osaka University.
    7. Liu, Chih-Chen & Wang, Leonard F.S. & Lee, Sang-Ho, 2015. "Strategic environmental corporate social responsibility in a differentiated duopoly market," Economics Letters, Elsevier, vol. 129(C), pages 108-111.
    8. Kitamura, Hiroshi, 2010. "Exclusionary vertical contracts with multiple entrants," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 213-219, May.
    9. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2013. "Certification of corporate social responsibility activities in oligopolistic markets," Canadian Journal of Economics, Canadian Economics Association, vol. 46(1), pages 282-309, February.
    10. Philipp Schreck, 2011. "Reviewing the Business Case for Corporate Social Responsibility: New Evidence and Analysis," Journal of Business Ethics, Springer, vol. 103(2), pages 167-188, October.
    11. Marie-Laure Allain & Claire Chambolle & Patrick Rey, 2016. "Vertical Integration as a Source of Hold-up," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 1-25.
    12. Yongmin Chen & Michael H. Riordan, 2007. "Vertical integration, exclusive dealing, and expost cartelization," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 1-21, March.
    13. Markus Kitzmueller & Jay Shimshack, 2012. "Economic Perspectives on Corporate Social Responsibility," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 51-84, March.
    14. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-1145, December.
    15. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
    16. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2014. "Strategic Corporate Social Responsibility Activities and Corporate Governance in Imperfectly Competitive Markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 35(7), pages 460-473, October.
    17. Flath, David, 1989. "Vertical integration by means of shareholding interlocks," International Journal of Industrial Organization, Elsevier, vol. 7(3), pages 369-380.
    18. Julian Wright, 2009. "Exclusive Dealing and Entry, When Buyers Compete: Comment," American Economic Review, American Economic Association, vol. 99(3), pages 1070-1081, June.
    19. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-685, Winter.
    20. Greenlee, Patrick & Raskovich, Alexander, 2006. "Partial vertical ownership," European Economic Review, Elsevier, vol. 50(4), pages 1017-1041, May.
    21. Kosuke Hirose & Sang-Ho Lee & Toshihiro Matsumura, 2020. "Noncooperative and Cooperative Environmental Corporate Social Responsibility," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 176(3), pages 549-571.
    22. Arya, Anil & Mittendorf, Brian & Sappington, David E.M., 2008. "Outsourcing, vertical integration, and price vs. quantity competition," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 1-16, January.
    23. Simon Loertscher & Michael H. Riordan, 2019. "Make and Buy: Outsourcing, Vertical Integration, and Cost Reduction," American Economic Journal: Microeconomics, American Economic Association, vol. 11(1), pages 105-123, February.
    24. David E. M Sappington, 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1631-1638, December.
    25. Yutian Chen, 2010. "Strategic Outsourcing between Rivals," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 301-311, November.
    26. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-142, March.
    27. Thomas Jungbauer & Sean Nicholson & June Pan & Michael Waldman, 2021. "The Organization of Innovation: Property Rights and the Outsourcing Decision," NBER Working Papers 28379, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lee, Sang-Ho & Matsumura, Toshihiro & Park, Chul-Hi, 2017. "Procurement of Advanced Technology and Welfare-Reducing Vertical Integration," MPRA Paper 79109, University Library of Munich, Germany.
    2. Arturo Garcia & Mariel Leal & Sang-Ho Lee, 2021. "Competitive CSR in a strategic managerial delegation game with a multiproduct corporation," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 68(3), pages 301-330, September.
    3. Hirose, Kosuke & Matsumura, Toshihiro, 2022. "Common ownership and environmental Corporate Social Responsibility," Energy Economics, Elsevier, vol. 114(C).
    4. Xu, Lili & Lee, Sang-Ho, 2021. "Strategic Corporate Social Responsibility by a Multinational Firm and International Privatization Policies," MPRA Paper 105651, University Library of Munich, Germany.
    5. Xu, Lili & Chen, Yuyan & Lee, Sang-Ho, 2022. "Emission tax and strategic environmental corporate social responsibility in a Cournot–Bertrand comparison," Energy Economics, Elsevier, vol. 107(C).
    6. Hunold, Matthias, 2020. "Non-Discriminatory Pricing, Partial Backward Ownership, and Entry Deterrence," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    7. Zanchettin, Piercarlo & Mukherjee, Arijit, 2017. "Vertical integration and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 25-57.
    8. Garcia, Arturo & Leal, Mariel & Lee, Sang-Ho, 2020. "Merger incentive and strategic CSR by a multiproduct corporation," MPRA Paper 98830, University Library of Munich, Germany.
    9. Lisa Planer-Friedrich & Marco Sahm, 2017. "Strategic Corporate Social Responsibility," CESifo Working Paper Series 6506, CESifo.
    10. Hunold, Matthias, 2017. "Backward ownership, uniform pricing and entry deterrence," DICE Discussion Papers 250, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    11. Arturo García & Mariel Leal & Sang-Ho Lee, 2019. "Endogenous Timing with a Socially Responsible Firm," Korean Economic Review, Korean Economic Association, vol. 35, pages 345-370.
    12. Lisa Planer-Friedrich & Marco Sahm, 2020. "Strategic corporate social responsibility, imperfect competition, and market concentration," Journal of Economics, Springer, vol. 129(1), pages 79-101, January.
    13. Hunold, Matthias & Schad, Jannika, 2021. "Single monopoly profits, vertical mergers, and downstream entry deterrence," DICE Discussion Papers 373, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    14. Xu, Lili & Fan, Xinying & Luan, Weixin, 2020. "Strategic corporate social responsibility of high-speed rail in China," China Economic Review, Elsevier, vol. 62(C).
    15. Planer-Friedrich, Lisa & Sahm, Marco, 2017. "Strategic corporate social responsibility," BERG Working Paper Series 124, Bamberg University, Bamberg Economic Research Group.
    16. Xu Lili & Lee Sang-Ho, 2022. "Corporate Profit Tax and Strategic Corporate Social Responsibility Under Foreign Acquisition," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 22(1), pages 123-151, January.
    17. Lisa Planer-Friedrich & Marco Sahm, 2021. "Strategic CSR in Asymmetric Cournot Duopoly," Journal of Industry, Competition and Trade, Springer, vol. 21(1), pages 33-42, March.
    18. Michiel Bijlsma & Viktoria Kocsis & Victoria Shestalova & Gijsbert Zwart, 2008. "Vertical foreclosure: a policy framework," CPB Document 157, CPB Netherlands Bureau for Economic Policy Analysis.
    19. Shekhar, Shiva & Thomes, Tim Paul, 2020. "Passive backward acquisitions and downstream collusion," Economics Letters, Elsevier, vol. 197(C).
    20. Seung-Leul Kim & Sang-Ho Lee & Toshihiro Matsumura, 2019. "Corporate social responsibility and privatization policy in a mixed oligopoly," Journal of Economics, Springer, vol. 128(1), pages 67-89, September.

    More about this item

    Keywords

    Demand-enhancing inputs; Commitment to procure; Make-or-buy decision; CSR procurement;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jeczfn:v:135:y:2022:i:3:d:10.1007_s00712-021-00759-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.