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Buying Back Subcontractors: The Strategic Limits of Backward Integration

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  • Didier Laussel

Abstract

In a model where a monopolistic downstream firm (assembler) negotiates simultaneously with each of its n subcontractors the prices of the complementary components which enter its product, we show that backward integration is limited by a strategic negative effect: the prices and profits of independent suppliers increase when a merger reduces their number. Mergers are profitable only if the downstream firm buys at least two thirds of its suppliers. In an endogenous acquisition game à la Kamien and Zang (1990) the only merged equilibrium occurs when there is only one subcontractor. In a sequential acquisition game full integration is not an equilibrium when the number of suppliers is at least five.

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  • Didier Laussel, 2008. "Buying Back Subcontractors: The Strategic Limits of Backward Integration," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(4), pages 895-911, December.
    • Handle: RePEc:bla:jemstr:v:17:y:2008:i:4:p:895-911
    DOI: 10.1111/j.1530-9134.2008.00199.x
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    Cited by:

    1. Didier Laussel & Joana Resende, 2020. "Complementary Monopolies with asymmetric information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(4), pages 943-981, November.
    2. Derek J. Clark & Jean-Christophe Pereau, 2021. "Group bargaining in supply chains," Review of Economic Design, Springer;Society for Economic Design, vol. 25(3), pages 111-138, September.
    3. Ursino Giovanni, 2015. "Supply Chain Control: A Theory of Vertical Integration," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(4), pages 1831-1866, October.
    4. Matsushima Noriaki & Mizuno Tomomichi, 2012. "Equilibrium Vertical Integration with Complementary Input Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-32, June.
    5. Matsushima, Noriaki & Mizuno, Tomomichi, 2013. "Vertical separation as a defense against strong suppliers," European Journal of Operational Research, Elsevier, vol. 228(1), pages 208-216.
    6. Laurent Linnemer, 2022. "Doubling Back on Double Marginalization," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 61(1), pages 1-19, August.
    7. Tatsuhiko Nariu & David Flath & Makoto Okamura, 2021. "A vertical oligopoly in which entry increases every firm's profit," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(3), pages 684-694, August.
    8. Kitamura, Hiroshi & Matsushima, Noriaki & Sato, Misato, 2018. "Exclusive contracts with complementary inputs," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 145-167.
    9. Filippini Luigi & Vergari Cecilia, 2017. "Vertical Integration Smooths Innovation Diffusion," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(3), pages 1-22, July.
    10. Markus Reisinger & Emanuele Tarantino, 2015. "Vertical integration, foreclosure, and productive efficiency," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 461-479, September.
    11. Noriaki Matsushima & Fumitoshi Mizutani, 2011. "Market Size and Vertical Structure in the Railway Industry," ISER Discussion Paper 0820, Institute of Social and Economic Research, Osaka University.
    12. Professor Dr. Joachim Zentes, 2011. "„Sustainability – Supply Security – Distributive Justice: A Global Area Of Conflict“," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 2(39), pages 201-218, May.
    13. Noriaki Matsushima & Fumitoshi Mizutani, 2014. "How Does Market Size Affect Vertical Structure When Considering Vertical Coordination? Application to the Railway Industry," Pacific Economic Review, Wiley Blackwell, vol. 19(5), pages 657-676, December.
    14. Noriaki Matsushima & Tomomichi Mizuno, 2010. "How do market structures affect decisions on vertical integration/separation?," ISER Discussion Paper 0770, Institute of Social and Economic Research, Osaka University.
    15. repec:dpr:wpaper:0918 is not listed on IDEAS
    16. Tarantino, Emanuele & Reisinger, Markus, 2016. "Patent Pools in Input Markets," CEPR Discussion Papers 11512, C.E.P.R. Discussion Papers.

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