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The Value of Interlocking Directorates in Vertical Contracting

Author

Listed:
  • Maria Rosa Battaggion
  • Vittoria Cerasi
  • Gulen Karakoc

Abstract

This study analyzes the choice to interlock between two competing companies when their privately known marginal costs are correlated. The two rivals are organized into different business models: one delegates its production to a subcontractor, while the other is vertically integrated and carries its production in-house. By accepting the interlock, the hosting company discloses its marginal cost to the rival. The two companies decide ex-ante whether to commit to interlock. In a Perfect Bayesian Equilibrium, the vertically separated company gains more from interlocking than the rival because it saves on internal agency costs and gains market power, otherwise unbalanced toward the competitor. Interestingly, we show the following: for high cost correlation allowing a unilateral interlock benefits consumers. Hence, our results provide reasons for approving horizontal interlocking in markets where companies have asymmetric business models, and the interlocking company outsources its production.

Suggested Citation

  • Maria Rosa Battaggion & Vittoria Cerasi & Gulen Karakoc, 2021. "The Value of Interlocking Directorates in Vertical Contracting," Working Papers 480, University of Milano-Bicocca, Department of Economics, revised Sep 2021.
    • Handle: RePEc:mib:wpaper:480
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    References listed on IDEAS

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    1. Sharpe, Steven A, 1990. "Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-1087, September.
    2. Raith, Michael, 1996. "A General Model of Information Sharing in Oligopoly," Journal of Economic Theory, Elsevier, vol. 71(1), pages 260-288, October.
    3. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
    4. Battaggion, Maria Rosa & Cerasi, Vittoria, 2020. "Strategic interlocking directorates," Journal of Economic Behavior & Organization, Elsevier, vol. 178(C), pages 85-101.
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    Cited by:

    1. Zhang, Tianyu, 2023. "Peer effects in R&D investment based on interlock network: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 89(C).

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    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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