Vertical equilibrium in a competitive input market

Imperfect competition, imperfect information, disequilibrium, and rationing all induce vertical integration in relatively straightforward ways. But can vertical integration arise when firms are competitive and markets clear rapidly? This paper demonstrates that a vertical equilibrium can be generated when the intermediate market is subject to external fluctuations and when there are economies of coordination for firms which avoid the market via integration. The vertical equilibrium is one in which some firms will be integrated while some will not, despite the fact that all firms are identical. Thus, one need not conclude that differential degrees of integration within industries are the result of differing circumstances among firms.     

VERTICAL INTEGRATION AND SHARED FACILITIES IN UNREGULATED INDUSTRIES

In this paper we analyze the equilibrium market structure, following liberalization, of an industry involving an essential facility. Two alternative modes of market entry are considered, in conjunction with vertical integration, namely: (i) full entry, which means building a new and more efficient facility at a positive fixed cost; and (ii) partial entry, which means purchasing existing capacity from the incumbent, at a fixed price per unit that is freely negotiated between the incumbent and the entrant. We show that vertical integration is a dominant strategy for each firm under either entry mode, and that upstream firms choose to share the incumbent's facility when the entrant's fixed cost exceeds a positive threshold. In addition, welfare analysis shows that in many situations the market can efficiently solve the trade-off between fixed-cost savings and softened downstream competition, thus providing a rationale for the liberalization of such industries. Several competition policy implications are discussed.     

纵向一体化趋势和市场竞争力关系研究--以江苏制造业的实证为例

本文运用I—O(投入产出表)法中Davies—Morris指数法,旨在分析一个产业或企业内纵向一体化的趋势。论文实证检验了江苏省制造业的纵向一体化的状况,估计和分析了江苏制造业的16个产业和各产业前5名的80个企业的纵向一体化趋势,并与其他国家的状况进行比较。     

DESIGNING A MARKET STRUCTURE WHEN FIRMS COMPETE FOR THE RIGHT TO SERVE THE MARKET*

In many industries, a regulator designs an auction to select ex‐ante the firms that compete ex‐post on the product market. This paper considers the optimal market structure when firms incur sunk costs before entering the market and when the government is not able to regulate firms in the market. We prove that a free entry equilibrium results in an excessive entry when the entry costs are private information. Then, we consider an auction mechanism selecting the firms allowed to serve the market and show that the optimal number of licences results in the socially optimal market structure. When all the potential candidates are actual bidders, the optimal number of firms in the market increases with the number of candidates and decreases with the social cost of public funds. When the market size is small, as the net profit in the market decreases with the number of selected firms, entry is endogenous. As increasing competition in the market reduces competition for the market, the optimal structure is more concentrated than in the previous case.     

Buyer power with atomistic upstream entry: Can downstream consolidation increase production and welfare?

This paper investigates the effects of buyer power on entry into an atomistic upstream market and economic welfare. Under reasonable market conditions, we show that industries with a few buyers induce more upstream entry than industries with a larger number of firms. In particular, monopsony can be more conducive to entry and lead to higher social welfare than more fragmented industry structures. This seeming paradox arises because a single buyer better internalizes the positive effects of entry on later-periods’ supply conditions than a collection of firms. This result is relevant in a number of market settings, including markets for specialized labor and processing markets for agricultural products.     

A note on vertical integration as entry

This paper examines the incentive for an intermediate product monopolist to integrate forward into a competitively-structured final product industry when that industry has failed to achieve a position of long-run equilibrium. It is shown that the upstream monopolist's profits are increased more by entering the downstream industry than are the profits of other firms unrelated to this industry. Consequently, the monopolist is more likely to overcome whatever entry barriers might exist at the downstream stage. The welfare effects of this form of integration are shown to be positive, and a theoretical foundation is provided for the policy distinction commonly made between vertical integration by a major acquisition versus integration through internal expansion or a toehold acquisition followed by expansion.     

Vertical integration and innovation

Innovation is a driving force for most industries, where it moreover affects many stages of the vertical chain. We study the impact of vertical integration on innovation in an industry where firms need to undertake risky R&D investments at both production and distribution stages. Vertical integration brings better coordination within the integrated firm, which boosts its investment incentive at both upstream and downstream levels. However, it is only mutually beneficial for firms to integrate when both upstream and downstream innovations are important. When innovation is irrelevant at one level, firms favor instead vertical separation. The analysis provides insights for the wave of mergers and R&D outsourcing observed in the pharmaceutical industry and other vertically related industries.     

中国服务业进入退出的影响因素——地区和行业面板数据的实证研究

本文利用14个细分行业和31个省份的面板数据,分别从行业和地区层面对影响我国服务业进入退出的各种因素进行了实证检验。实证结果表明,行业本身的盈利前景是吸引企业进入服务业的主要因素,服务业的进入退出更多是市场机制作用的结果。然而,企业在进入服务业时也面临着因行业的专业化壁垒、高素质劳动力稀缺和在位企业扩大经营规模的策略性行为导致的进入障碍,特别是在转轨时期,政府对服务业的行政管制、垄断经营以及对制造业的控制都会制约服务业的自由进入和退出。并且,相对于经济性的进入障碍,政府的控制力对服务业进入退出机制的扭曲要更严重。     

Entry into Nascent Industries: Disentangling a Firm's Capability Portfolio at the Time of Investment Versus Market Entry

Research summary : This article examines the capability antecedents of firm entry into nascent industries. Because a firm's technological investments in nascent industries typically occur before market entry, this study makes a distinction between firm capabilities at the time of market entry and at the time of initial investment. At the time of market entry, core technical capabilities and complementary assets influence the likelihood of entry. However, at the time of investment, a firm's integrative capabilities as well as the initial stocks of related technical capabilities and complementary assets become critical, as they enable endogenous development of core technical capabilities and complementary assets by the time of entry. The empirical sample consists of firms involved in field experiments in agricultural biotechnology during the period 1980–2010. Managerial summary : New product commercialization in a nascent industry typically requires access to not only core technologies of the focal industry, but also supporting commercialization assets. However, firms may not possess these critical capabilities when they first invest in the industry. Instead, empirical evidence from the context of agricultural biotechnology shows that at the time of first investment, a firm's integrative capabilities partly explain their likelihood of entry. Integrative capabilities encompass a set of practices that enable effective coordination and communication, and in turn put firms in an advantageous position to develop the needed capabilities by the time of entry. Copyright © 2017 John Wiley & Sons, Ltd.     

Why Do Established Firms Enter Some Industries and Exit Others? Empirical Evidence on Italian Business Groups

In this paper the determinants of entry and exitdecisions are analysed empirically on a sample of wellestablished business groups operating in Italianmanufacturing. The focus is on the role of sunk costsas entry barriers. Two competing hypotheses aretested. On the one hand, setup costs, R & D andadvertising outlays act as barriers to entry for bothnew and already established firms because of theirindustry-specific commitment value. On the other hand,they may induce established firms, which operate insimilar industries, to enter. This is the case if R & Dand advertising are firm-specific investments whichgenerate externalities to be efficiently exploited inadjacent industries. Overall results suggest that thesecond hypothesis gives a better picture of thebehaviour of our sample of firms.     

Risk and the strategy of foreign location choice in regulated industries

We argue that firms in regulated industries react to macroeconomic and policy risks in sharply different ways. While they seek to avoid countries with high levels of macroeconomic uncertainty, we predict that they find it more attractive to expand into countries characterized by governments with discretionary policymaking capacities so as to be able to negotiate favorable conditions of entry. We also argue that firms are heterogeneous in their attitudes toward risk. We predict that firms in which the state holds a partial equity stake exhibit a more tolerant attitude. We also expect that as firms accumulate foreign experience, they develop an aversion toward further foreign entries into politically unstable markets. Support for these predictions is provided by an analysis of the Latin American market entries of all listed Spanish firms in regulated industries between 1987 and 2000. Copyright © 2008 John Wiley & Sons, Ltd.     

Vertical integration and product differentiation

We study a new channel of downstream rent extraction through vertical integration: competition for integration. Innovative downstream firms create value and profit opportunities through product differentiation, which however affects an upstream monopolist’s incentive to vertically integrate. By playing the downstream firms against each other for integration, the upstream firm can extract even more than the additional profits generated by the downstream firms’ differentiation activities. To preempt rent extraction, the downstream firms may then reduce differentiation, which reduces social welfare. We show that this social cost of vertical integration is more likely to arise in innovative and competitive industries, and that the competition for integration channel of downstream rent extraction is robust to upstream competition.     

The role of firm resources and organizational attributes in determining entry timing: a cross-industry study

We investigate the factors that influence the timing of entry of firms into new industries based on new technology. Consistent with previous research, it is hypothesized that firm resources and organizational attributes influence entry timing. Unlike previous research, there is specific consideration of how industry setting—specifically, the extent to which it offers first mover advantages—influences the ability to predict timing of entry. The ability to explain entry timing differed across industries, with success occurring in the industry with strong first mover advantages. Two categories of resources, technological and marketing, were found to be associated with early entry. The organizational attributes that influenced early entry were commitment to a threatened market and (surprisingly) greater size. © 1998 John Wiley & Sons, Ltd.     

The celler kefauver act and the deterrent effect

The purpose of this paper is to identify the major determinants of innovation and to examine whether they affect small firms differently than large firms. Using a cross-section of 247 four-digit SIC industries, we present an econometric analysis testing the hypothesis that innovation rates in 1982 were significantly influenced by market structure, and that these influences had disperate effects among large and small firms. We find that, while market structure does explain the variation in innovation rates across industries, the relationships are not always consistent with certain previously maintained hypotheses. Similarly, we find that innovation activity for large firms responds to a different market activity than does innovation for small firms.     

Bilateral strategic groups: The market for nontactical navy information systems

Although recent studies of strategic groups have provided much insight into the nature of intra-industry rivalry, most studies have focused on the strategies of seller firms. In this paper we argue that the bilateral exchange between groups of buyers and sellers in adjacent markets should be made explicit. Within this bilateral context, the market for non-tactical Navy infomation systems is empirically examined. Strategic groups are developed for both seller and buyer industries, and the interaction between these groups are explored over time. In particular, two market interventions, the imposition of industrial funding procedures in 1984 and a Life-Cycle requirement order in 1988, were examined with respect to their impact on seller/customer exchanges and vertical integration strategies. Significant changes in strategies were noted, and explained within a transaction cost framework.     

Vertical Integration and Costly Demand Information in Regulated Network Industries

We study how vertical integration affects the acquisition and transmission of demand information in regulated network industries. Demand information helps to set the access price, incentivize infrastructure investment, and foster competition in the unregulated downstream market. We show that when demand information is costly and private, the optimal access prices are independent of demand levels. Vertical integration then secures greater welfare in new markets where little demand information is available or where infrastructure cost is low, or when investing is highly risky. In the remaining cases, vertical separation is preferable.     

Switching Costs in Vertically Related Markets

In the presence of switching costs, firms are ofteninterested in expanding current market shares toexploit their customer base in the future. However, ifthe product is sold by retailers, manufacturers mayface the problem of extracting too much surplus fromthe retailer. If this happens, then the latter has notan incentive to build a subscriber base. This paperwould like to connect two streams in the literature,on switching costs and vertical restraintsrespectively. An upstream–downstream duopoly model ispresented to analyse the mutual incentive for firms toenter into particular trading relationships. Whenswitching costs are high, then integrated structuresare predicted. On the other hand, when lock in effectsare not too relevant, mixed structures withindependent and integrated firms emerge as anequilibrium in growing industries. The results arediscussed with reference to the UK mobiletelecommunications industry.     

Non-discrimination rules for ISPs and vertical integration: Lessons from cable television

The experience of cable television indicates that vertically integrated ISPs have plausible incentives to favor their affiliated content and to restrict entry of nascent rival content services, but these incentives are weakened in some respects, and strengthened in others, by differences in the economic architectures of cable and Internet broadband. Non-discrimination regulations designed to control such behavior are potentially more effective than in cable, but rules governing discrimination both in the upstream access and the downstream retail markets (as the FCC's no-unreasonable-discrimination rule appears to do) are likely to be necessary for effectiveness. Beneficial effects of vertical integration on financing and entry of cable programming networks should also apply to Internet video content development, but emergence since the 1970s of a robust programming supply industry with few vertical ties to cable suggests that such benefits will be less significant in the ISP case. Finally, the history of both the cable and ISP industries makes evident that the fundamental policy concern should not be vertical integration but horizontal market shares of ISPs, both at the local and national levels.     

Investment dynamics in markets with endogenous demand

I examine entry into markets where demand is an increasing function of past sales because of learning, networks, or fashion. Demand is initially unknown (with firms learning in Bayesian fashion) and grows endogenously over time. The competitive expansion path and the efficient/monopoly solution differ not only with respect to levels (the market's investment is too low), but also time patterns : externalities contribute to S-shaped diffusion. There is also path-dependence: small initial differences may determine whether the market will grow or not open. Policy arguments for subsidizing entry into new markets, especially in infant export industries, are examined.     

Discrimination in Dynamic Procurement Design with Learning-by-doing

We study the long-run impact of procurement discrimination on market structure and future competition in industries where learning-by-doing makes incumbent firms more efficient over time. We consider a sequential procurement design problem in which local and global firms compete for public good provision. Both firms benefit from learning-by-doing if they provide the public good in the previous period, but global firms only may be able to transfer learning-by-doing from different markets. We show that the optimal procurement has to be biased in favor of the local firm even when all firms are symmetric with respect to their initial cost distribution.