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Buyer-Supplier Interaction, Asset Specificity, And Product Choice

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Author Info
Nisvan Erkal

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Abstract

The goal of this paper is to explore how the demand for specific investments may affect the product variety in a bilateral duopolistic industry. In the literature on the hold-up problem, it is generally assumed that the degree of specificity of investments is either exogenously determined or chosen by the suppliers. We develop a model where the degree of specificity of investments is endogenously determined through the product choices of both buyers and suppliers. In an environment where input prices are determined by bilateral negotiations, we show that the existence of alternative buyers causes suppliers to choose less-than-fullyspecialized input types. Their location and investment choices crucially depend on the degree of product differentiation in the downstream market. This implies that the buyers may choose to increase their own competition by producing more similar products in order to increase the suppliers’ investment incentives. The results offer an explanation for why we may observe instances of intermediate product differentiation by focusing on the interactions between buyers and suppliers.

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File URL: http://www.economics.unimelb.edu.au/SITE/research/workingpapers/wp03/885.pdf
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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 885.

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Length: 47 pages
Date of creation: 2003
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Handle: RePEc:mlb:wpaper:885

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Postal: Department of Economics, The University of Melbourne, 5th Floor, Economics and Commerce Building, Victoria, 3010, Australia
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Related research
Keywords: asset specificity; vertical interactions; product differentiation;

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Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
R12 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

References listed on IDEAS
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    Other versions:
  4. 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). [Downloadable!]
    Other versions:
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  21. Farrell, Joseph & Gallini, Nancy T, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 673-94, November. [Downloadable!] (restricted)
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  22. Rhee, Byong-Duk, et al, 1992. "Restoring the Principle of Minimum Differentiation in Product Positioning," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(3), pages 475-505, Fall.
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Cited by:
(explanations, 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.)

  1. Noriaki Matsushima & Tomomichi Mizuno, 2009. "Input specificity and product differentiation," ISER Discussion Paper 0745, Institute of Social and Economic Research, Osaka University. [Downloadable!]
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