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Protecting Weak Suppliers in Endogenous Vertical Structure

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  • Ryosuke Tsuritani

    (Kobe University
    Nagasaki University)

Abstract

Considering a three-tier supply chain with a sub-supplier, a focal supplier, and a manufacturer, we explore the policy implications of legal measures designed to protect suppliers with weak bargaining power, such as abuse of a superior bargaining position. The focal supplier purchases inputs from the sub-supplier and sells its products to the manufacturer. Suppliers’ selling prices are determined through Nash bargaining. We find that the suppliers remain separated when the focal supplier has weak bargaining power over the manufacturer or strong bargaining power over the sub-supplier. This is because upstream vertical separation makes the focal supplier inefficient and may increase its distributed surplus in Nash bargaining with the manufacturer. This result explains why multi-tier supply chains exist even if the legal protection for weak suppliers exists, and further justifies the policy interventions that strengthen the bargaining power of sub-suppliers in such supply chains, as these interventions may encourage upstream vertical integration.

Suggested Citation

  • Ryosuke Tsuritani, 2025. "Protecting Weak Suppliers in Endogenous Vertical Structure," Journal of Industry, Competition and Trade, Springer, vol. 25(1), pages 1-18, December.
    • Handle: RePEc:kap:jincot:v:25:y:2025:i:1:d:10.1007_s10842-025-00456-7
    DOI: 10.1007/s10842-025-00456-7
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    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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