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Procurement of Advanced Technology and Welfare-Reducing Vertical Integration

Author

Listed:
  • Lee, Sang-Ho
  • Matsumura, Toshihiro
  • Park, Chul-Hi

Abstract

This article presents a model in which two downstream firms compete in a differentiat-ed product market and choose whether to adopt new advanced inputs supplied by the monopolist, while standard inputs are competitively supplied. When the monopoly sup-plier is independent, from the welfare viewpoint, the incentive to adopt the new inputs is insufficient (can be excessive) given that the rival does not adopt (adopts). When the monopoly supplier and one downstream firm merge, such integration increases the un-integrated downstream firm’s incentive to adopt the new input supplied by the rival and thus helps the spread of new inputs in the industry. However, because of the collusive effect of increasing the prices of the final products, vertical integration can be harmful for welfare despite the reduction in the welfare loss due to double marginalization and the increase in product quality.

Suggested Citation

  • Lee, Sang-Ho & Matsumura, Toshihiro & Park, Chul-Hi, 2017. "Procurement of Advanced Technology and Welfare-Reducing Vertical Integration," MPRA Paper 79109, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:79109
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    File URL: https://mpra.ub.uni-muenchen.de/79109/1/MPRA_paper_79109.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    demand-enhancing inputs; commitment to procure; make-or-buy decision; CSR pro-curement;

    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
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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