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Why do large firms tend to integrate vertically? - asymmetric vertical integration reconsidered -

Author

Listed:
  • Noriaki Matsushima

    (Graduate School of Business Administration, Kobe University)

  • Tomomichi Mizuno

    (Graduate School of Economics, Kobe University)

Abstract

We provide a theoretical framework to discuss the relation between firm size and vertical structures. The framework is based on a Hotelling model with three downstream and three upstream firms. Each downstream firm procures its input from each upstream firm and the procurement problems affect the locations of the firms. We show that the downstream firm that has the largest market share is more likely to integrate vertically. In other words, integrated firms tend to have a large market share. We also show that vertical integration enhances the degree of product differentiation. As a result, vertical integration mitigates the competition among the downstream firms. We briefly discuss whether inefficient downstream firms tend to integrate vertically. We conclude that this is true because those downstream firms tend to be far away from those rival firms and vertical integration enables downstream firms to escape tough competition.

Suggested Citation

  • 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.
  • Handle: RePEc:kbb:dpaper:2007-34
    as

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    File URL: https://www.b.kobe-u.ac.jp/papers_files/2007_34.pdf
    File Function: First version, 2007
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    References listed on IDEAS

    as
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    8. Abiru, Masahiro & Nahata, Babu & Raychaudhuri, Subhashis & Waterson, Michael, 1998. "Equilibrium structures in vertical oligopoly," Journal of Economic Behavior & Organization, Elsevier, vol. 37(4), pages 463-480, December.
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    More about this item

    Keywords

    vertical integration; asymmetry; product differentiation; location;

    JEL classification:

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

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