What Determines Market Structure? An Explanation from Cooperative Investment with Non‐Exclusive Co
In a common agency setting, where the common buyer undertakes cooperative investment with her suppliers, we obtain a direct link between the level of ex-post competition and investment which affects the market structure of the supply side of the market. We show that more competitive equilibria are associated with a larger and more homogeneous distribution of investment among active suppliers, and an equilibrium with no investment might occur when competition is mild. In our model, buyer's investment works as a mechanism to incentivize competition, and its effectiveness is positively related to the level of competition ex-post. In general, the equilibrium investment profile is lower than efficiency, and we surprisingly find that higher competitive markets may sustain a larger number of suppliers.
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- Yeon-Koo Che & Tai-Yeong Chung, 1999. "Contract Damages and Cooperative Investments," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 84-105, Spring.
- Roig, Guillem, 2014. "Competition and the Hold‐U p Problem: a Setting with Non‐exclusive Contracts," TSE Working Papers 14-481, Toulouse School of Economics (TSE).
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- Tommaso Valletti, 2000. "Switching Costs in Vertically Related Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 17(4), pages 395-409, December. Full references (including those not matched with items on IDEAS)
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