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Market Size and Vertical Equilibrium in the Context of Successive Cournot Oligopolies

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  • Ivan Dufeu

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, Métis Lab EM Normandie - EM Normandie - École de Management de Normandie)

Abstract

This paper illustrates the effect of market size on the decision of whether or not firms should vertically integrate or disintegrate. We use a model of two successive stages of production with Cournot competition in each stage. In this model, firms choose to specialize (either upstream or downstream) or to integrate the two stages, before making their production decisions. The decision of whether or not to integrate or specialize depend on the trade-off between "escaping from" the double marginalization problem or the gain from specializing on the production stage in which the firm is more efficient. We show (using simulations) that more firms choose to be vertically integrated as the valuation of the final product or the number of consumers increase, unless the number of firms increases proportionately

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  • Ivan Dufeu, 2004. "Market Size and Vertical Equilibrium in the Context of Successive Cournot Oligopolies," Working Papers hal-00581571, HAL.
    • Handle: RePEc:hal:wpaper:hal-00581571
    Note: View the original document on HAL open archive server: https://hal.science/hal-00581571
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    References listed on IDEAS

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    1. Gérard Gaudet & Ngo Van Long & Antoine Soubeyran, 1999. "Upstream-Downstream Specialization by Integrated Firms in a Partially Integrated Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 14(4), pages 321-335, June.
    2. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(2), pages 345-356.
    3. Young, Allyn A., 1928. "Increasing Returns and Economic Progress," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 38, pages 527-542.
    4. Wilder, Ronald P & Tucker, Irvin B, 1984. "Trends in Vertical Integration: Reply," Journal of Industrial Economics, Wiley Blackwell, vol. 32(3), pages 391-392, March.
    5. Géarard Gaudet & Ngo Van Long, 1996. "Vertical Integration, Foreclosure, and profits in the Presence of Double Marginalization," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 409-432, September.
    6. Perry, Martin K., 1984. "Vertical equilibrium in a competitive input market," International Journal of Industrial Organization, Elsevier, vol. 2(2), pages 159-170, June.
    7. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59(3), pages 185-185.
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    Cited by:

    1. Kensuke Kubo, 2011. "Explaining vertical integration in the generic pharmaceutical industry," Discussion Papers 11-02, Indian Statistical Institute, Delhi.
    2. Zanaj Skerdilajda, 2010. "Successive Oligopolies and Decreasing Returns," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-26, November.
    3. Ivan Dufeu, 2008. "Déterminants du choix d’intégration et de désintégration verticale des entreprises," Post-Print hal-02815119, HAL.
    4. Matsushima Noriaki & Mizuno Tomomichi, 2012. "Equilibrium Vertical Integration with Complementary Input Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-32, June.
    5. Noriaki Matsushima & Tomomichi Mizuno, 2007. "Why do large firms tend to integrate vertically? - asymmetric vertical integration reconsidered -," Discussion Papers 2007-34, Kobe University, Graduate School of Business Administration.
    6. Yvan Dufeu, 2008. "Déterminants du choix d’intégration et de désintégration verticale des entreprises," Revue Finance Contrôle Stratégie, revues.org, vol. 11(1), pages 131-154, March.
    7. Zanaj Skerdilajda, 2010. "Successive Oligopolies and Decreasing Returns," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-26, November.
    8. Buehler, Stefan & Schmutzler, Armin, 2008. "Intimidating competitors -- Endogenous vertical integration and downstream investment in successive oligopoly," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 247-265, January.

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