Does Vertical Integration Promote Downstream Incomplete Collusion? An Evaluation of Static and Dynamic Stability

This paper analyzes the impact of vertical integration on the static and dynamic stability of downstream incomplete collusion. It is shown that a vertical merger between an upstream firm and a downstream cartel or fringe firm promotes downstream collusion, under certain conditions on the market size. However, for low downstream market concentration, a vertical merger with a cartel firm hinders collusion. Moreover, a welfare analysis shows that consumer surplus increases with the vertical merger because the merger partially eliminates the double marginalization problem.     

Successive Oligopolies,Vertical Downstream Integration and Foreclosure

Vertically integrated firms have repeatedly been accused of abusing a dominant position by refusing to sell the intermediate product to non-integrated downstream producers and thus to practice foreclosure. To evaluate the merit of such an accusation requires an adequate theory of vertical integration which allows to decide whether a refusal to sell follows straightforwardly from profit maximization or is driven by an intent to monopolize. We investigate whether in the case of successive oligopolies vertical integration is profitable for the participating firms and to what extent cross deliveries between integrated and non-integrated firms can be expected to arise. By contrast to the previous literature where at the downstream level Cournot competition has been assumed to prevail between integrated firms and non-integrated downstream producers, we propose a model where integrated firms and non-integrated upstream suppliers meet in Cournot competition and take as given the inverse demand function for both the final and the intermediate product. Game theory is invoked to examine whether an integrated firm will participate in the intermediate market. If marginal costs at the downstream level are constant and identical as between integrated and non-integrated firms, integrated firms will never wish to sell to non-integrated downstream producers they can, however, be expected to buy from non-integrated upstream suppliers. Utilizing theoretical implications regarding pass through of changes in marginal costs we find empirical evidence supporting the applicability of our model to the gasoline industry in Germany. We finally examine to what extent issues of competition policy and public regulation arise.JEL classification: D43, L1, L22, L42, L71*We gratefully acknowledge helpful suggestions from Horst Albach, Alexandra Gross-Schuler, Otto Hass, Michael Niederalt, Felix Schuler, Achim Wambach, Christian Winkler, and unknown referees of the JICT. The usual disclaimer applies.     

International mergers: Incentives and welfare

Information asymmetry creates incentives for firms from different countries to merge. To demonstrate this point, we develop a model of international oligopolistic competition under demand uncertainty and asymmetric information. We show that when domestic firms but not foreign firms are completely informed of local market demands, information sharing enhances the profitability of a merger between a domestic firm and a foreign firm. We also examine how such a merger affects the non-merging firms' profits, consumer surplus and social welfare.     

Internationalisation, industrial policy and clusters

This paper analyses industrial policy in an open economy hosting an agglomeration consisting of vertically linked upstream and downstream firms. We show that optimal policy towards upstream and downstream industries may typically differ radically in this setting as compared to the case of a closed economy. Internationalisation in terms of international mobility of firms as well as reduced trade costs is found to have significant impact on policy design. We find that in addition to technology and demand characteristics, degree of mobility and level of trade cost are key determinants of tax and subsidy levels.     

Separation versus Affiliation with Partial Vertical Ownership in Network Industries

Abstract

The separation of integrated monopolies and new market entrants has changed vertical interactions between suppliers and dealers. Firms have substituted full integration with vertical restraints, leading to collusive behaviour harmful to competition. We examine how a partial vertical ownership (an affiliation) of one of the competing downstream retailers by the upstream monopoly could help internalise the production decision after a complete divestiture. Our results in a Cournot framework confirm the positive role of partial integration on firms’ profits and consumer surplus in increasing social welfare. These results are consistent with empirical studies of economies after vertical separation in network industries.     

Input Pricing and Market Share Delegation in a Vertically Related Market: Is the Timing Order Relevant?

This paper adds to the literature on the strategic use of managers’ contracts in competition by examining whether market‐share delegation, in which managers receive rewards based on a combination of profits and market share, and the order of moves affect input pricing in a vertically related market. It shows that: (i) input pricing is not affected by delegation form and the order of moves between upstream and downstream firms under quantity competition; (ii) downstream firms obtain the same profit as in the simple Nash equilibrium regardless of delegation forms in a delegation–input price–quantity competition game; and (iii) the upstream monopolist will set input price beforehand regardless of the delegation form. Since the outcomes in our model create higher quantity and lower price in a Cournot product market, it lessens the double‐marginalization problem in such a vertically separated industry.     

Food Retailing and Supply Chain Linkages in the Russian Federation

Abstract

This paper focuses on the evolution of Russian food retailing and linkages between and among firms in the food supply chain. Intermediation theory is used to develop a conceptual framework. Intermediaries have played an important role throughout the Russian food supply chain fulfilling the function of matching sellers and buyers. Tighter vertical linkages between firms in the Russian food industry are becoming more prevalent, and the roles of intermediaries may be performed by agents acting on behalf of a vertically integrated principal. The food retailing sector in the Russian Federation is evolving to be a source of information from the consumer to upstream firms.     

A study of the structural integration of the marketing and PR functions in the C-suite

Recently, a number of firms have structurally integrated the distinct yet related functions of marketing and public relations (PR), under the leadership of a single corporate-, or C-level, executive. Such actions, as well as turf wars between the functions over social media ownership and related stakeholder management conflicts, have reignited the debate over whether marketing and PR should be separated or unified. By drawing on the pros and cons of integration, as suggested by prior conceptual research on integrated marketing communications, and using secondary data for a set of Fortune 500 firms, this study empirically tests this issue for multiple outcomes and contingencies. Results show that the integration of marketing and PR has positive benefits for firm reputation, an effect that is weakened as firm size increases, and positive effects for firm profitability in service-oriented firms.     

Cross-border mergers and market concentration in a vertically related industry: theory and evidence

We present a tractable model of oligopoly to identify the linkages between local competition and cross-border mergers in a vertically related industry. We show that the incentives for cross-border mergers rise with vertical integration in an industry when the premerger concentration in that industry is sufficiently high relative to the concentration in the same industry in a foreign country. We also show that the incentives for a merger between a foreign firm and a vertically integrated home firm will be higher than that for a merger between a foreign firm and a disintegrated home firm, when the premerger concentration at home is low relative to the premerger concentration in the foreign country. We then analyze a firm-level panel of 90,614 M&A observations, between 1990 and 2012, from 86 countries. Logistic regressions confirm that market concentration is an important determinant of cross-border M&A. Our results support the conjectures of our theoretical model and are consistent with recent empirical findings and theoretical predictions.     

ENDOGENOUS QUALITY CHOICE AND THE IMPACT OF QUANTITATIVE RESTRICTIONS

In this article a model of vertical product differentiation with two firms (a home firm and a foreign firm) engaged in endogenous quality competition. The firms engage in a two-stage game, where in the first stage they choose qualities in a sequential manner. In the second stage, the firms compete in quantities (a la Cournot) moving sequentially again. In the second part of this article, the impact of quantitative restrictions (ike a VER or quota) on the quality choices and other related variables like prices, firm profitability, consumer surplus, etc.     

Small firms and the merger mania

Empirical research has found an average or even superior performance of small firms. This seems to be at variance with the secular concentration process and the recurrent merger waves. This paper tries to integrate size and merger research. Higher profitability of small firms is explained by their incentive structure and shorter decision lags but also by lower wages and higher individual risk (premia). Their faster growth in the eighties was, in addition, fostered by diversification of demand, miniaturization of technology, and a need for flexibility under uncertainty. The merger wave on the other hand does not necessarily prove that large firms are superior. Managers and shareholders may be seduced by stockmarket optimism, a sizeable industry of banks, agents and lawyers have their own interests in mergers, mergers may be important in declining markets and for the acquisition of technology. On average, mergers do not improve efficiency, profits or internal growth. Small and large firms serve different purposes. Performance depends on the market, incentives and technology. The establishment, growth and closure of small firms as well as mergers are attempts to find the optimal organization for utility maximization in a world of severe uncertainty and diverse needs.     

Sequential Mergers and Antitrust Authority’s Decisions in Stackelberg Markets

This paper analyses a sequential merger formation game in a setting where: (i) firms compete à la Stackelberg; (ii) mergers may give rise to endogenous efficiency gains; and (iii) every merger has to be submitted for approval to the Antitrust Authority (AA). Two different types of AA are studied: first, we assume a myopic AA, which accepts or rejects a given merger without considering that this merger may be followed by other mergers; and, second, a forward looking AA, which anticipates the final industry structure a merger will give rise to, if approved. We conclude that these two types of AA adopt similar decisions whenever a merger would not trigger the exit of outsider firms. Their decisions are, however, shown to be very different when evaluating exit-inducing merger proposals.     

Determinants of chief executive officer compensation following major acquisitions

This study sought to determine whether major increases in firm size, achieved through acquisitions, result in greater chief executive officer (CEO) compensation, given manager versus owner control. A second issue addressed is whether the type of firm—single industry or multiple industry—plays a role in the linkage between acquisition activity and additional compensation. Other variables included in the analysis were CEO tenure and profitability. Annual observations from 1979 through 1986 of 50 firms that had engaged in acquisition activity form the basis of the study. Findings reveal that acquisitions, after allowing 1 year for the full impact of the merger to be felt, led to significant increases in CEO compensation for both owner- and manager-controlled firms. Also, it was found that manager-controlled firms gave their CEOs further rewards for additional years on the job, regardless of performance, while owner-controlled firms were found to reward more on the basis of performance.     

Counterfeiting and firm survival. Do international trade activities matter?

Counterfeiting is a phenomenon that threatens global competition and economic growth, and it is well-known that the presence of illicit fake products unfairly altering competition, can affect firm profitability and even, in some cases, force owners to close their businesses or declare bankruptcy. By introducing three new complementary measures of counterfeiting, this study examines the intra- and inter-industry effects of counterfeiting on Italian firm survival taking into consideration the differing degree of a firm’s involvement in international trade activities. Overall, the results of micro-econometric analysis indicate that the probability of a genuine firm exiting the market increases when the effect flows from the “fake” sector to its upstream genuine suppliers; vice versa, it decreases when the effect flows from the “fake” sector to its downstream genuine customers. However, when classifying firms as trading and no trading firms, we found that these results are confirmed only for the latter. Our evidence, which is robust to different estimation methods, provides room for policy and manager interventions.     

When Organizational Justice Matters for Affective Merger Commitment

We investigate when organizational justice matters to employees’ commitment in the postacquisition process after a company is taken over in a cross‐border acquisition. Overwhelming evidence from the literature suggests that employees who are treated fairly during acquisitions are more committed to their new firms. We extend this finding by dividing organizational justice into three subdimensions: informational justice, interpersonal justice, and procedural justice. We find evidence that procedural justice is an important antecedent of affective merger commitment at an early stage of the integration period, while informational justice becomes important at a later stage. Further analysis on heterogeneity between the target firm's employees and the bidder firm's employees reveals that, immediately after the acquisition, target firm's employees value knowing where they will be at the new firm (procedural justice), while bidder firm employees are more concerned about communication and transparency (informational justice). Our results point to the importance of organizational justice in a cross‐border merger and acquisition (M&A) setting and the need for a separate study of issues related to bidder firms and target firms. © 2016 Wiley Periodicals, Inc.     

CLV

SUMMARY

It is becoming increasingly clear from the literature that there is a need for a metric that can objectively measure future profitability of the customer to the firm. This paper traces the emergence of such a metric—the customer lifetime value (CLV) and discusses the two measures of computing CLV—the aggregate approach and the individual level approach. Subsequently, eight strategies that are available to firms for maximizing CLV are discussed. These strategies assist firms in deciding how to: select the best customer, make loyal customers profitable, optimally allocate the resources, pitch the right product to the right customer at the right time, link acquisition and retention to profitability, prevent customer attrition, encourage multi-channel shopping behavior, and maximize brand value. Each of these strategies was successfully implemented by different firms across various industries, resulting in significant increases in the bottom-line. Further, the challenges in implementing a CLV-based framework in a B-to-C organization are also discussed with an illustration.     

Endogenous retailer preferences in intermediate good markets

We model strategic interaction in a differentiated input market as a game among two suppliers and n retailers. Each one of the upstream firms chooses the specification of the input which it will offer.Then, retailers choose their type from a continuum of possibilities. The decisions made in these two first stages affect the degree of compatibility between each retailer's ideal input specification and that of the inputs offered by the two upstream firms. In a third stage, upstream firms compete setting input prices. Equilibrium may be of the two-vendor policy or of the technological monopoly type.     

Competition and Market Structure Reconsidered

A number of models of oligopoly in which long-run equilibrium is given by zero profit are extended to examine further the extent to which the number of firms increases indefinitely with market size. The limitations of the modelling framework are critically assessed with particular emphasis on the neglect of competition through vertically integrated economic processes. As an alternative, it is suggested that competition and industrial structure would be better studied by differentiating vertically between the different “systems of provision” through which particular goods are supplied, taking account of the integral connections between chains of economic activity, rather than generalizing across sectors and the competition within them.     

How does FDI inflow affect productivity of domestic firms? The role of horizontal and vertical spillovers,absorptive capacity and competition

This paper examines the existence of externalities associated with foreign direct investment (FDI) in a host country by exploiting firm-level panel data covering the Polish corporate sector. We distinguish between horizontal spillovers (from foreign to domestic firms operating in the same industry) and two types of vertical spillovers: backward (from FDI in downstream industries) and forward spillovers (from FDI in upstream industries). The main findings are as follows. Local firms benefit from foreign presence in the same industry and in downstream industries. The absorptive capacity of domestic firms is highly relevant to the size of spillovers: vertical spillovers are larger for R&D-intensive firms, while firms investing in other (external) types of intangibles benefit more from horizontal spillovers. Competitive pressure facilitates backward spillovers, while market power increases the extent of forward spillovers. Horizontal spillovers are particularly strong in services, while the remaining results, including backward spillovers and the role of absorptive capacity and competition, are mainly driven by manufacturing. Host country equity participation in foreign firms is consistent with higher unconditional productivity spillovers to domestic firms. A number of robustness checks yield results qualitatively similar to those obtained in the baseline specification.     

The dynamics of entry,exit and profitability: An error correction approach for the retail industry

We develop a two equation error correction model to investigate determinants of and dynamic interaction between changes in profits and number of firms in retailing. An explicit distinction is made between the effects of actual competition among incumbants, new firms competition and potential competition from firms outside the market. Effects of cost, demand and general income changes on profitability are investigated to gain insight in the role of retailing in the cost, demand and wage inflationary processes. The relative importance of profitability, growth and unemployment as determinants of net entry are studied. The model is tested using a panel data set of 36 Dutch shoptypes covering the 1977–1988 period.