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Integration versus non-integration: specific investments and ex-post resource distribution

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  • Yutaka Suzuki

Abstract

I adopt a non-cooperative game theoretic approach to an incomplete contracting transaction model, a la Grossman & Hart (1986), Hart & Moore (1990) and Bolton & Whinston (1993), consisting of one upstream firm and two downstream firms. When the downstream firms need to make relation-specific investments, they can increase their ex-post bargaining position by vertically integrating ex-ante with the upstream firm with an essential asset. By introducing an explicit mechanism, bidding, which the firms can use to transfer the control right of the upstream asset, I compare the regimes of vertical integration (ex-ante) with ex-post renegotiation and non-integration, analyse equilibrium investment incentives, and show that vertical integration will evolve under certain conditions.

Suggested Citation

  • Yutaka Suzuki, 2005. "Integration versus non-integration: specific investments and ex-post resource distribution," International Economic Journal, Taylor & Francis Journals, vol. 19(1), pages 11-35.
    • Handle: RePEc:taf:intecj:v:19:y:2005:i:1:p:11-35
    DOI: 10.1080/1351161042000320434
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    References listed on IDEAS

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    1. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 39-84.
    2. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    3. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401, December.
    4. Konishi, Hideki & Okuno-Fujiwara, Masahiro & Suzuki, Yutaka, 1996. "Competition through Endogenized Tournaments: An Interpretation of "Face-to-Face" Competition," Journal of the Japanese and International Economies, Elsevier, vol. 10(3), pages 199-232, September.
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    Cited by:

    1. Kolesnik, Georgiy, 2011. "Перекрестные Права Собственности И Их Влияние На Эффективность Вертикальной Интеграции Предприятий [Cross-ownership and its influence on vertical integration efficiency of enterprises]," MPRA Paper 57474, University Library of Munich, Germany.

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