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Cost reducing strategies



We consider an industry where one of the manufacturers and its supplier (S) have engaged in some specific investment in the past. We assume that this has three consequences: S has lower expected production costs than other suppliers, supplier-switching costs exist, and the manufacturer may limit its rivals’ access to S. In the case when only S knows its true production costs, we compare alternative mechanisms to induce S to reveal its private information, namely, paying informational rents, using threats of switching suppliers, and most importantly, permitting S to serve other firms. We prove that the presence of asymmetric information mitigates the manufacturer’s incentives to engage in vertical restraints. We derive several policy implications from this result.

Suggested Citation

  • Pau Olivella & Maite Pastor, 2003. "Cost reducing strategies," Investigaciones Economicas, Fundación SEPI, vol. 27(1), pages 5-37, January.
  • Handle: RePEc:iec:inveco:v:27:y:2003:i:1:p:5-37

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    Adapting to more efficient suppliers; supplier switching costs; sharing suppliers; vertical restraints; asymmetric information;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design


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