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Equilibrium Vertical Integration with Complementary Input Markets

Author

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  • Matsushima Noriaki

    () (Osaka University)

  • Mizuno Tomomichi

    () (University of Nagasaki)

Abstract

We provide a model to investigate vertical integration decisions. This model assumes that local downstream manufacturers require two inputs to make their final products. One input is produced by a supplier shared by both manufacturers; another is produced by an exclusive supplier for each manufacturer. We show that vertical integration of each downstream firm with its exclusive supplier enhances the input demand for the common supplier, leading to an increase in the common supplier's input price due to the elimination of the double marginalization. Moreover, downstream firms that require a smaller quantity of inputs from the common supplier, for instance, those with efficient production technology or smaller downstream demand, are more likely to vertically integrate because vertical integration yields a smaller increase in input price. Thus, the cause of firm-size heterogeneity is important to consider when investigating the relationship between firm size and the tendency to vertically integrate.

Suggested Citation

  • 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.
  • Handle: RePEc:bpj:bejeap:v:12:y:2012:i:1:n:26
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    References listed on IDEAS

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    Cited by:

    1. Kitamura, Hiroshi & Matsushima, Noriaki & Sato, Misato, 2018. "Exclusive contracts with complementary inputs," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 145-167.
    2. 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.
    3. Reisinger, Markus & Tarantino, Emanuele, 2016. "Patent Pools in Input Markets," CEPR Discussion Papers 11512, C.E.P.R. Discussion Papers.
    4. Ursino Giovanni, 2015. "Supply Chain Control: A Theory of Vertical Integration," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(4), pages 1831-1866, October.
    5. Markus Reisinger & Emanuele Tarantino, 2015. "Vertical integration, foreclosure, and productive efficiency," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 461-479, September.
    6. repec:dpr:wpaper:0918 is not listed on IDEAS

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