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Vertical Disintegration: A Dynamic Markovian Approach

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  • Didier Laussel
  • Ngo Van Long

Abstract

In a model where a monopolistic downstream firm (assembler) negotiates simultaneously with each of its intermediate‐input suppliers the prices of the complementary components which enter its product, we analyze the process by which the assembler separates from its suppliers as a Markov Perfect equilibrium. Due to a negative strategic effect (the prices and profits of independent suppliers decrease when their number increases), the assembler’s marginal return from keeping an upstream subsidiary is lower than the market value of an independent supplier. Separation is immediate when the downstream firm’s initial number of upstream subsidiaries is below a critical level. It is progressive in the reverse case and eventually leads to a mixed strategy whereby the assembler keeps all the remaining subsidiaries with some probability, and sells all them off in one go with the complementary probability.

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  • Didier Laussel & Ngo Van Long, 2012. "Vertical Disintegration: A Dynamic Markovian Approach," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(3), pages 745-771, September.
    • Handle: RePEc:bla:jemstr:v:21:y:2012:i:3:p:745-771
    DOI: j.1530-9134.2012.00345.x
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    Cited by:

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    4. Markus Reisinger & Emanuele Tarantino, 2015. "Vertical integration, foreclosure, and productive efficiency," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 461-479, September.
    5. Crettez, Bertrand & Hayek, Naila & Martín-Herrán, Guiomar, 2025. "Existence of equilibrium in a dynamic supply chain game with vertical coordination, horizontal competition, and complementary goods," European Journal of Operational Research, Elsevier, vol. 321(1), pages 302-313.
    6. Ngo Long, 2015. "Dynamic Games Between Firms and Infinitely Lived Consumers: A Review of the Literature," Dynamic Games and Applications, Springer, vol. 5(4), pages 467-492, December.
    7. Matsushima, Noriaki & Mizuno, Tomomichi, 2013. "Vertical separation as a defense against strong suppliers," European Journal of Operational Research, Elsevier, vol. 228(1), pages 208-216.
    8. Spulber, Daniel F., 2016. "Patent licensing and bargaining with innovative complements and substitutes," Research in Economics, Elsevier, vol. 70(4), pages 693-713.
    9. Noriaki Matsushima & Fumitoshi Mizutani, 2014. "How Does Market Size Affect Vertical Structure When Considering Vertical Coordination? Application to the Railway Industry," Pacific Economic Review, Wiley Blackwell, vol. 19(5), pages 657-676, December.
    10. Tarantino, Emanuele & Reisinger, Markus, 2016. "Patent Pools in Input Markets," CEPR Discussion Papers 11512, C.E.P.R. Discussion Papers.

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