IDEAS home Printed from https://ideas.repec.org/p/kbb/dpaper/2006-09.html
   My bibliography  Save this paper

Vertical mergers and product differentiation

Author

Listed:
  • Noriaki Matsushima

    (Graduate School of Business Administration, Kobe University)

Abstract

This paper presents the development of an equilibrium theory of vertical merger that incorporates strategic behaviors in the Hotelling-type location model for the purpose of considering the relationship between the strategies of downstream firms for product differentiation and vertical integration. I show that vertical integration enhances the degree of product differentiation of the integrated firm. Under some conditions, partial integration appears to be in equilibrium and may increase the profit of the non-integrated downstream firm. Welfare implications of vertical integration are briefly discussed.

Suggested Citation

  • Noriaki Matsushima, 2006. "Vertical mergers and product differentiation," Discussion Papers 2006-09, Kobe University, Graduate School of Business Administration.
    • Handle: RePEc:kbb:dpaper:2006-09
    as

    Download full text from publisher

    File URL: https://www.b.kobe-u.ac.jp/papers_files/2006_09.pdf
    File Function: First version, 2006
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-640, May.
    2. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    3. Furusawa, Taiji & Konishi, Hideo, 2007. "Free trade networks," Journal of International Economics, Elsevier, vol. 72(2), pages 310-335, July.
    4. Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 25-51, March.
    5. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    6. Hamilton, Jonathan H. & Thisse, Jacques-Francois & Weskamp, Anita, 1989. "Spatial discrimination : Bertrand vs. Cournot in a model of location choice," Regional Science and Urban Economics, Elsevier, vol. 19(1), pages 87-102, February.
    7. Paul Belleflamme & Eric Toulemonde, 2003. "Product differentiation in successive vertical oligopolies," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 36(3), pages 523-545, August.
    8. MacLeod, W.B. & Norman, G. & Thisse, J.-F., 1988. "Price discrimination and equilibrium in monopolistic competition," International Journal of Industrial Organization, Elsevier, vol. 6(4), pages 429-446.
    9. Oliver Hart & John Moore, 1999. "Foundations of Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 115-138.
    10. Lynne Pepall & George Norman, 2001. "Product Differentiation and Upstream‐Downstream Relations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(2), pages 201-233, June.
    11. Paul Belleflamme & Francis Bloch, 2004. "Market sharing agreements and collusive networks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 387-411, May.
    12. Sharon Novak & Steven D. Eppinger, 2001. "Sourcing By Design: Product Complexity and the Supply Chain," Management Science, INFORMS, vol. 47(1), pages 189-204, January.
    13. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
    14. Riordan, Michael H, 1998. "Anticompetitive Vertical Integration by a Dominant Firm," American Economic Review, American Economic Association, vol. 88(5), pages 1232-1248, December.
    15. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-282, March.
    16. Tai-Yeong Chung, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(5), pages 1031-1042.
    17. Jay Pil Choi & Sang-Seung Yi, 2000. "Vertical Foreclosure with the Choice of Input Specifications," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 717-743, Winter.
    18. Géarard Gaudet & Ngo Van Long, 1996. "Vertical Integration, Foreclosure, and profits in the Presence of Double Marginalization," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 409-432, September.
    19. Eaton, B Curtis & Schmitt, Nicolas, 1994. "Flexible Manufacturing and Market Structure," American Economic Review, American Economic Association, vol. 84(4), pages 875-888, September.
    20. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
    21. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-142, March.
    22. Rachel E. Kranton & Deborah F. Minehart, 2000. "Networks versus Vertical Integration," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 570-601, Autumn.
    23. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(2), pages 345-356.
    24. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    25. Sanjeev Goyal & Sumit Joshi, 2006. "Bilateralism And Free Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 749-778, August.
    26. Salop, Steven C & Scheffman, David T, 1987. "Cost-Raising Strategies," Journal of Industrial Economics, Wiley Blackwell, vol. 36(1), pages 19-34, September.
    27. Matsushima, Noriaki, 2004. "Technology of upstream firms and equilibrium product differentiation," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1091-1114, November.
    28. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    29. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
    30. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-259, April.
    31. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-460, March.
    32. Reiffen, David, 1992. "Equilibrium Vertical Foreclosure: Comment," American Economic Review, American Economic Association, vol. 82(3), pages 694-697, June.
    33. Bonaccorsi, Andrea & Giuri, Paola, 2001. "The long-term evolution of vertically-related industries," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1053-1083, July.
    34. Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, vol. 91(3), pages 485-508, June.
    35. Ching‐To Albert Ma, 1997. "Option Contracts and Vertical Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 725-753, December.
    36. Billand, P. & Bravard, C., 2004. "Non-cooperative networks in oligopolies," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 593-609, May.
    37. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 2, number 2.
    38. Norman, George & Thisse, Jacques-Francois, 1999. "Technology Choice and Market Structure: Strategic Aspects of Flexible Manufacturing," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 345-372, September.
    39. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 57-82.
    40. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 1, number 1.
    41. Masten, Scott E, 1984. "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 403-417, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zanchettin, Piercarlo & Mukherjee, Arijit, 2017. "Vertical integration and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 25-57.
    2. Stefano Colombo & Arijit Mukherjee, 2023. "Location of Firms and Outsourcing," Games, MDPI, vol. 14(6), pages 1-20, October.
    3. Leahy Dermot & Montagna Catia, 2017. "Economising, Strategising and the Vertical Boundaries of the firm," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 17(1), pages 1-35, January.
    4. Youping Li & Jie Shuai, 2018. "A Welfare Analysis of Location Space Constraints with Vertically Separated Sellers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 161-177, February.
    5. Luis Antonio Andrade Rosas & Héctor Alonso Olivares Aguayo & Carlos Alberto Jiménez Bandala, 2023. "¿Objetivos económicos o sobrevivencia? teoría de juegos con riesgo durante el COVID-19," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 18(4), pages 1-22, Octubre -.
    6. Ebina, Takeshi & Matsushima, Noriaki & Nishide, Katsumasa, 2022. "Demand uncertainty, product differentiation, and entry timing under spatial competition," European Journal of Operational Research, Elsevier, vol. 303(1), pages 286-297.
    7. Inés Macho‐Stadler & Noriaki Matsushima & Ryusuke Shinohara, 2021. "Organizational Structure and Technological Investment," Journal of Industrial Economics, Wiley Blackwell, vol. 69(4), pages 785-816, December.
    8. Yen-Ju Lin & Yan-Shu Lin & Kuang-I Tu, 2016. "Strategic input outsourcing and equilibrium location choice," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 56(1), pages 83-99, January.
    9. Takeshi Ebina & Noriaki Matsushima, 2017. "Product differentiation and entry timing in a continuous-time spatial competition model with vertical relations," ISER Discussion Paper 1009, Institute of Social and Economic Research, Osaka University.
    10. Vettas, Nikolaos & Kourandi, Frago, 2010. "Endogenous Spatial Differentiation with Vertical Contracting," CEPR Discussion Papers 7948, C.E.P.R. Discussion Papers.
    11. Yen-Ju Lin & Yan-Shu Lin & Kuang-I Tu, 2016. "Strategic input outsourcing and equilibrium location choice," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 56(1), pages 83-99, January.
    12. 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.
    13. Noriaki Matsushima & Tomomichi Mizuno, 2009. "Input specificity and product differentiation," ISER Discussion Paper 0745, Institute of Social and Economic Research, Osaka University.
    14. Noriaki Matsushima & Fumitoshi Mizutani, 2011. "Market Size and Vertical Structure in the Railway Industry," ISER Discussion Paper 0820, Institute of Social and Economic Research, Osaka University.
    15. Youping Li & Jie Shuai, 2017. "Vertical separation with location–price competition," Journal of Economics, Springer, vol. 121(3), pages 255-266, July.
    16. Aiura, Hiroshi & Sato, Yasuhiro, 2008. "Welfare properties of spatial competition with location-dependent costs," Regional Science and Urban Economics, Elsevier, vol. 38(1), pages 32-48, January.
    17. Silveira, Douglas & Vasconcelos, Silvinha, 2020. "Essays on duopoly competition with asymmetric firms: Is profit maximization always an evolutionary stable strategy?," International Journal of Production Economics, Elsevier, vol. 225(C).
    18. 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.
    19. Vermeulen, B. & Huisman, K.J.M. & Kok, A.G. de, 2015. "Vertical governance change and product differentiation under decreasing component costs," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 65-76.
    20. Noriaki Matsushima & Tomomichi Mizuno, 2007. "Why do large firms tend to integrate vertically? - asymmetric vertical integration reconsidered -," Discussion Papers 2007-34, Kobe University, Graduate School of Business Administration.
    21. Noriaki Matsushima & Tomomichi Mizuno, 2010. "How do market structures affect decisions on vertical integration/separation?," ISER Discussion Paper 0770, Institute of Social and Economic Research, Osaka University.
    22. Gelves, J. Alejandro & Heywood, John S., 2016. "Pre-emptive mergers and downstream cost asymmetry," Economics Letters, Elsevier, vol. 147(C), pages 23-26.
    23. Toshihiro Matsumura & Noriaki Matsushima, 2007. "On patent licensing in spatial competition with endogenous location choice," Discussion Papers 2007-35, Kobe University, Graduate School of Business Administration.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Matsushima, Noriaki & Shinohara, Ryusuke, 2014. "What factors determine the number of trading partners?," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 428-441.
    3. Yeon-Koo Che & Jozsef Sakovics, 2006. "The Hold-up Problem," Edinburgh School of Economics Discussion Paper Series 142, Edinburgh School of Economics, University of Edinburgh.
    4. Matsushima, Noriaki, 2004. "Technology of upstream firms and equilibrium product differentiation," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1091-1114, November.
    5. Mehrdad Vahabi, 1999. "From Walrasian General Equilibrium to Incomplete Contracts: Making Sense of Institutions," Post-Print halshs-03704424, HAL.
    6. Erkal, Nisvan, 2007. "Buyer-supplier interaction, asset specificity, and product choice," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 988-1010, October.
    7. Committee, Nobel Prize, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    8. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
    9. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, January.
    10. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    11. Choi, Jay Pil & Yi, Sang-Seung, 2016. "An equilibrium model of investment-reducing vertical integration," Research in Economics, Elsevier, vol. 70(4), pages 659-676.
    12. M'hand Fares, 2006. "Renegotiation Design and Contract Solutions to the Hold‐Up Problem," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 731-756, December.
    13. Yeon-Koo Che & József Sákovics, 2004. "A Dynamic Theory of Holdup," Econometrica, Econometric Society, vol. 72(4), pages 1063-1103, July.
    14. Marie-Laure Allain & Claire Chambolle & Patrick Rey, 2016. "Vertical Integration as a Source of Hold-up," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 1-25.
    15. Watson, Joel & Wignall, Chris, 2009. "Hold-Up and Durable Trading Opportunities," University of California at San Diego, Economics Working Paper Series qt8p8284wg, Department of Economics, UC San Diego.
    16. Zava Aydemir & Stefan Buehler, 2002. "Estimating Vertical Foreclosure in U.S. Gasoline Supply," SOI - Working Papers 0212, Socioeconomic Institute - University of Zurich.
    17. Buzard, Kristy & ,, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
    18. Buzard, Kristy & ,, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
    19. Robert Evans, 2008. "Simple Efficient Contracts in Complex Environments," Econometrica, Econometric Society, vol. 76(3), pages 459-491, May.
    20. Zanchettin, Piercarlo & Mukherjee, Arijit, 2017. "Vertical integration and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 25-57.

    More about this item

    Keywords

    product differentiation; vertical integration; location model; foreclosure;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kbb:dpaper:2006-09. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Yasuyuki Miyahara (email available below). General contact details of provider: https://edirc.repec.org/data/bskobjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.