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Strategic Separation from Suppliers of Vital Complementary Inputs: A Dynamic Markovian Approach

  • Ngo Van Long
  • Didier Laussel

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 its market value as 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 it keeps all the remaining subsidiaries with some probability, and sells all them off in one go with the complementary probability. Nous étudions le processus de séparation entre une firme à l'aval et des firmes à l'amont qui lui fournissent des inputs complémentaires. À cause d'un effet stratégique négatif, le profit marginal de la firme à l'aval de garder une firme à l'amont comme filiale est moins élevé que la valeur de cette dernière au marché des bourses. La séparation est immédiate si le nombre de filiales à l'amont est inférieur à un certain niveau critique. La séparation est graduelle dans le cas inverse et demande une stratégie mixte éventuelle.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2011s-41.

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Length: 38 pages
Date of creation: 01 Apr 2011
Date of revision:
Handle: RePEc:cir:cirwor:2011s-41
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