Do firms choose overcapacity or undercapacity in a vertical structure?

This study investigates capacity choice in a vertical structure in which each downstream firm makes its capacity decision, then a monopolistic upstream firm proposes the input price or two-part tariff contract. Finally, each downstream firm chooses its output (or price). Contrary to the conventional wisdom that both firms hold excess capacity in an Cournot competition, we find that each downstream firm always chooses undercapacity regardless of both the nature of goods and the competition modes. Second, we also show that capacity efficiency is higher under Cournot competition than under Bertrand competition. Third, even though there are double marginalization distortion and rent-extracting effect, we can achieve the monopoly equilibrium of the vertically integrated firm though two-part tariff contract.     

Downstream Competition, Foreclosure, and Vertical Integration

This paper analyzes the effect of competition among downstream firms on an upstream firm's payoff and on its incentive to integrate vertically when firms in both segments negotiate optimal contracts. We argue that as downstream competition becomes more intense, the upstream firm obtains a larger share of a smaller downstream industry profit. The upstream firm may encourage downstream competition (even excessively) in response to high downstream bargaining power. The option of vertical integration may be a barrier to entry downstream and may trigger strategic horizontal spinoffs or mergers. We extend the analysis to upstream competition.     

Picking a loser: Strategic surprise in a design and development game

We take a setting in which upstream players produce design ideas and downstream players select among these ideas to develop finished products. Design diversity is valuable at the upstream stage and coordination is valuable at the downstream stage. However, this outcome is not always realized. We show that an intermediary between upstream and downstream can improve on equilibrium outcomes by acting as a coordination and commitment device whose optimal policy must sometimes reward inferior ideas. We apply the model to technology standards, trend‐driven industries, political primaries, and the management of process innovation. We discuss incentives to vertically integrate.     

Vertical Disintegration

With economies of scale, a vertically integrated firm can lower its upstream cost by supplying downstream competitors. The competitors may strategically choose not to purchase from the integrated firm, unless the latter's price for the intermediate good is sufficiently lower than those of alternative suppliers. In a simple model of dynamic scale economies through learning by doing, equilibrium vertical disintegration occurs if and only if total industry profit is higher under vertical separation than under integration. The model bridges a logical gap in George Stigler's classic theory on vertical organization, and sheds light on the widely observed phenomenon of vertical disintegration .     

Vertical Integration and Proprietary Information Transfers

Suppose that rival downstream producers of a final good contract with the same upstream supplier of an input and, in the process, reveal private information. A vertical merger between the upstream supplier and one of the downstream firms may dissipate the information advantage of the remaining downstream firms. The welfare consequences of such a merger and related information sharing depend on the value of information, the benefits of integration apart from information sharing, and the nature of upstream competition. In this paper, conditions are found under which owners of a vertically integrated firm are better off breaking up into independent firms. This result may explain AT&T's recent spinoff of Lucent Technologies. Further results suggest that a prohibition on information transfers, such as that often proposed by the Federal Trade Commission and Department of Justice as a precursor to approving vertical mergers, may actually reduce expected consumer surplus and expected social welfare.     

Diagnostic Tests of Cross‐section Independence for Limited Dependent Variable Panel Data Models*

This article considers the problem of testing for cross‐section independence in limited dependent variable panel data models. It derives a Lagrangian multiplier (LM) test and shows that in terms of generalized residuals of Gourieroux et al. (1987) it reduces to the LM test of Breusch and Pagan (1980) . Because of the tendency of the LM test to over‐reject in panels with large N (cross‐section dimension), we also consider the application of the cross‐section dependence test (CD) proposed by Pesaran (2004) . In Monte Carlo experiments it emerges that for most combinations of N and T the CD test is correctly sized, whereas the validity of the LM test requires T (time series dimension) to be quite large relative to N. We illustrate the cross‐sectional independence tests with an application to a probit panel data model of roll‐call votes in the US Congress and find that the votes display a significant degree of cross‐section dependence.     

Privatisation and vertical integration under a mixed duopoly

This paper analyses the privatisation of public firms when private firms may be vertically integrated with their suppliers. We consider a mixed duopoly with a vertically integrated public firm. The private firm bargains the price of the input with its supplier if they are not vertically integrated. We find that for a given bargaining power of the private firm, it vertically integrates with its supplier if goods are weak substitutes. We also find that there is less vertical integration in the mixed duopoly than in the private duopoly. Finally, in general, the public firm is privatised when goods are close substitutes and the bargaining power of the private firm is low enough.     

Vertical Networks, Integration, and Connectivity

This paper studies competition in a network industry with a stylized two layered network structure, and examines: (i) price and connectivity incentives of the upstream networks, and (ii) incentives for vertical integration between an upstream network provider and a downstream firm. The main result of this paper is that vertical integration occurs only if the initial installed-base difference between the upstream networks is sufficiently small, and in that case, industry is configured with two vertically integrated networks, which yields highest incentives to invest in quality of interconnection. When the installed-base difference is sufficiently large, there is no integration in the industry, and neither of the firms have an incentive to invest in quality of interconnection. An industry configuration in which only the large network integrates and excludes (or raises cost of) its downstream rival does not appear as an equilibrium outcome: in the presence of a large asymmetry between the networks, when quality of interconnection is a strategic variable, the large network can exercise a substantial market power without vertical integration. Therefore, a vertically separated industry structure does not necessarily yield procompetitive outcomes.     

A NEW SECTORAL TAXONOMY BASED ON PECUNIARY KNOWLEDGE EXTERNALITIES: KNOWLEDGE INTERACTIONS IN A VERTICALLY INTEGRATED SYSTEM

The paper presents a new sectoral taxonomy that focuses on the existence of non-negligible external effects that derive from user–producer knowledge interactions. These are coupled with intermediate goods transactions, in a system of vertically integrated manufacturing and services sectors. These externalities, the so-called pecuniary knowledge externalities, are the main source of changing technological conditions experienced by downstream producers. A distinguishing feature of the taxonomy lies in its derivation from a particularly dynamic context of changing production functions. The taxonomy is empirically derived, examining effects generated by technological knowledge in a system of intermediate goods transactions and taking into account peculiar characteristics of sectors in European economies. The results allow for a classification of sectors in five groups. An analysis of these classes confirms previous evidence that technological characteristics of sectors across classes differ.     

LOCATION OF VERTICALLY LINKED OLIGOPOLISTS

This paper examines the geographical equilibrium of location of N vertically linked firms and its relation to the creation of an industrial cluster. In a two-region spatial economy, a monopolist firm supplies an input to N consumer goods firms that compete in quantities. When the transport cost of the input increases, downstream firms prefer to agglomerate where the upstream firm is located, to save in production cost. However, simultaneous increases in the transport cost of the input and of the consumer good or increases in the number of downstream firms lead to a relative dispersion of these firms, to reduce competition and locate closer to the local final consumer. In contrast to Mayer (2000) , when both transport costs increase, the location decision of downstream firms is based more on the geographical point that maximizes accessibility to the local final consumer than on the geographical point that minimizes the production cost.     

Upstream market structure and downstream partial ownership

Existing studies on partial ownership usually overlook the effects of vertically related markets. Our paper highlights the importance of the upstream market on downstream firms' incentives to acquire partial ownership and the consequent welfare implications. In the main model, we assume that there are three firms in the downstream market, two of which may form a partial ownership arrangement. We find several results that are in contrast to those in the literature. First, the two firms will engage in partial ownership if the upstream market is an oligopoly (triopoly or duopoly). Second, partial ownership may raise total production, consumer surplus, and social welfare. This happens when the upstream market consists of a duopoly and the two firms involved in partial ownership are supplied by different suppliers. Third, the outsider, commonly known as a free rider in the literature, may become a victim of partial ownership. Our results are robust to several extensions, including a general $n$-firm framework, product differentiation, and uniform pricing by upstream firms. We also provide the conditions under which the curvature of the demand function and the convexity of the cost function motivate firms to form partial ownership.     

Vertical Integration, Foreclosure, and profits in the Presence of Double Marginalization

Whether vertical integration between a downstream oligopolist and an upstream oligopolist is profitable for an integrated pair of firms is shown to depend on whether one means by this that profits increase no matter what other firms do, that all integrated firms are better off when all firms are integrated than when none are, or simply that no downstream-upstream pair of firms has an incentive to deviate from a situation where all firms are integrated. It is also shown to depend on the number of firms in each oligopoly and on the type of interaction that is assumed between firms that are integrated and firms that are not. In particular, it is shown that if no restriction is put on trade between integrated and nonintegrated firms, integrated firms may continue to purchase inputs from the nonintegrated upstream firms, with the goal of raising their downstream rivals' costs. Furthermore, even though firms are identical, asymmetric equilibria, where integrated and nonintegrated firms coexist, may actually arise as an outcome of the integration game.     

Estimating scale economies in financial intermediation: a doubly indirect inference

This paper provides a vertically integrated modelling of the financial production process. In a first stage the activity of commercial banks or insurance companies embodies some technical and commercial aspects such as services to depositors or mutualization of risk through distribution of contracts of insurance. In the second stage banks are involved in the intermediation activity. By using a simulation and the doubly indirect inference method for the estimation we were able to resolve two main econometric problems: decomposition of aggregated data over two vertically integrated stages of production and inconsistency of the estimators due to endogeneity and misspecification. An application to French Banking industry is provided.     

Institutional constraints on organizations: the case of Spanish car dealerships

We study the effect of organizational choice and institutions on the performance of Spanish car dealerships. Using outlet‐level data from 1994, we find that vertically integrated dealerships showed substantially lower labor productivity, higher labor costs and lower profitability than franchised ones. Despite these gaps in performance, no vertically integrated outlet was separated until 1994, yet the few outlets that were eventually separated systematically improved their performance. We argue that the conversion of integrated outlets into franchised ones involved significant transaction costs, due to an institutional environment favoring permanent, highly unionized employment relations. In line with this argument, we find that the observed separations occurred in distribution networks that underwent marked reductions in worker unionization rates, following the legalization of temporary labor contracts. Copyright © 2008 John Wiley & Sons, Ltd.     

Structure and performance of US wholesale trade

Using an industry-level sample, the author examines the extent to which wholesale trade is carried out by vertically integrated as opposed to non-integrated distributors. Using this sample and a sample of divisions of manufacturing firms, he tests the impact of industry structure, group structure within industry and firm structure on performance at the wholesale level.     

A model of vertical integration and investment in generation capacity in electricity markets: The case of the bidding game

The aim of this work is to assess the impact of (partial) vertical integration between generators and retailers on generation capacity choice and its subsequent welfare consequences. We present a framework in which final demand is perfectly inelastic and stochastic. Nevertheless, wholesale demand is elastic because of the existence of outside opportunities (mainly international transmission capacity). The model is a three-stage game. Neither transmission nor retail costs are taken into account.

In the first stage of the game, generators choose capacity only knowing distribution of demand and thus maximizing their expected profit. The second stage of the game represents the competition for market share between retailers in a market where consumers have switching costs. The former face unknown demand and maximize their utility based on two factors: the expected profit and a risk element. Finally, generators submit bid functions to the system operator given known demand and maximizing their profit during the last stage of the game. Retailers and generators interact in the wholesale market, which is cleared by the system operator whose function is to match supply (represented by the bids of the generators) and demand through a system of single price auctions. The wholesale market is the only means to buy and sell energy; there are no bilateral contracts between firms, except if they are vertically integrated.

We compare fully disintegrated and partially vertically integrated structures using a comparative statics approach. In this paper, the analysis will focus on the last stage of the game: the bidding game. We find that partial vertical integration between generators and retailers tends to lower wholesale prices but not unambiguously. Depending on which firm (vertically integrated or disintegrated generator) has installed the higher capacity and depending on level of demand, prices can stay unchanged or even rise.     

Product Differentiation and Upstream-Downstream Relations

This paper examines the relationship between a differentiated downstream market and a specialized upstream market. We analyze three different types of vertical relation between the upstream and downstream sectors when the upstream market supplies specialized and complementary inputs to a downstream product-differentiated market. The first is the benchmark case of decentralized markets, the second is a network of alliances among upstream suppliers, and the third is partial vertical integration. We identify the perfect equilibrium for a symmetric model in each case and show that there is no simple relationship between the degree of connection between upstream and downstream firms and profitability. The key factor affecting prices and the relative profitability of the different market organizations is the degree of product differentiation among the downstream firms, because it affects the intensity of competition among upstream suppliers. We show that vertical foreclosure is not an equilibrium strategy.     

Barriers to Entry of a Vertically Integrated Health Insurer: An Analysis of Welfare and Entry Costs

I investigate the reasons why market expansion attempts by vertically integrated health insurers have largely failed. I use an econometric model of consumer demand for hospitals and insurers to simulate entry of an integrated plan into 28 new markets. The results indicate that entry would increase social surplus by over $34 billion per year. I then investigate several potential barriers to entry. Three are particularly important. Integrated plans cannot attract enough enrollees to support their provider networks unless they exceed competitor quality levels and convince consumers of this benefit. Regulatory restrictions on plans building new facilities may also be important.     

Vertical integration as a remedy for imbalances in the ‘Porterian’ value system. The Dutch financial securities industry at the beginning of the 20th century

The way of accounting for vertical integration, of this paper is based on the ‘Porterian’ value system and focuses on the relation between the creation and appropriation of value. The essence of a value system is that at each stage in the system value is created and added to the value created at previous stages. We propose that firms which are unable to appropriate the value they create at the stage they currently inhabit, would find it advantageous to integrate vertically towards stages offering a more attractive relation between value appropriation and value creation. This argument will be illustrated here by the case of a large Dutch bank that integrated vertically towards securities trading.     

悬挑式脚手架在高层建筑施工中的应用

悬挑式脚手架是一种利用悬挑在建筑物上的支撑结构搭设的施工用脚手架,架体可沿建筑物垂直方向分段悬挑,能够满足不同高度的外脚手架搭设需要,弥补了落地式脚手架搭设高度的限制,比升降式脚手架施工工艺简便,现在已被广泛应用于高层建筑施工中。