Downstream Concentration and Producer's Capacity Choice
AbstractThis paper studies how buyers' integration affects the capacity choice of a producer. Contrary to "conventional wisdom", we show that, under natural assumptions, integration may lead to a higher equilibrium supply level. Our result hinges on the following trade-off: for any given level of capacity, the share of the total surplus accruing to the producer is lower when concentration is high, i.e. the hold-up is more severe. Yet, this share decreases when capacity increases. This reduces the incentives to increase capacity. The rate at which this occurs is higher when concentration is low. The second effect counteracts, and may dominate, the first. When the cost of capacity is low the equilibrium supply level is always higher when downstream concentration is high.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 04.13.
Length: 27 pages
Date of creation: Aug 2004
Date of revision:
Contact details of provider:
Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
More information through EDIRC
buyer integration; capacity choice; hold-up;
Find related papers by JEL classification:
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hart, Sergiu & Mas-Colell, Andreu, 1996.
"Bargaining and Value,"
Econometric Society, vol. 64(2), pages 357-80, March.
- Hart, Oliver & Moore, John, 1990.
"Property Rights and the Nature of the Firm,"
Journal of Political Economy,
University of Chicago Press, vol. 98(6), pages 1119-58, December.
- Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
- Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
- Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 201-28, Fall.
- Martin J Osborne & Ariel Rubinstein, 2009.
"A Course in Game Theory,"
814577000000000225, UCLA Department of Economics.
- Roman Inderst & Christian Wey, 2005.
"Buyer Power and Supplier Incentives,"
Discussion Papers of DIW Berlin
464, DIW Berlin, German Institute for Economic Research.
- Roman Inderst & Christian Wey, 2003. "Buyer Power and Supplier Incentives," CIG Working Papers SP II 2003-05, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- Inderst, Roman & Wey, Christian, 2002. "Buyer Power and Supplier Incentives," CEPR Discussion Papers 3547, C.E.P.R. Discussion Papers.
- repec:att:wimass:9714 is not listed on IDEAS
- Tasneem Chipty & Christopher M. Snyder, 1999. "The Role Of Firm Size In Bilateral Bargaining: A Study Of The Cable Television Industry," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 326-340, May.
- Gul, Faruk, 1989. "Bargaining Foundations of Shapley Value," Econometrica, Econometric Society, vol. 57(1), pages 81-95, January.
- Donald B. Hausch & Yeon-Koo Che, 1999.
"Cooperative Investments and the Value of Contracting,"
American Economic Review,
American Economic Association, vol. 89(1), pages 125-147, March.
- Ilya Segal & Michael D. Whinston, 2000. "Exclusive Contracts and Protection of Investments," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 603-633, Winter.
- David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 361-386, May.
- Roman Inderst & Tommaso M. Valletti, 2008.
"Buyer Power and the “Waterbed Effect”,"
CEIS Research Paper
107, Tor Vergata University, CEIS, revised 10 Jul 2008.
- Inderst, Roman & Wey, Christian, 2010.
"Countervailing power and dynamic efficiency,"
DICE Discussion Papers
01, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
- Baake, Pio & von Schlippenbach, Vanessa, 2011.
"Quality distortions in vertical relations,"
DICE Discussion Papers
18, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
- Battigalli, Pierpaulo & Fumagalli, Chiara & Polo, Michele, 2006.
"Buyer Power and Quality Improvements,"
CEPR Discussion Papers
5814, C.E.P.R. Discussion Papers.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudine Delapierre Saudan).
If references are entirely missing, you can add them using this form.