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Market Size and Vertical Equilibrium in the Context of Successive Cournot Oligopolies

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  • Dufeu Ivan

    (Normandy Business School, France, ivan.dufeu@univ-rennes1.fr)

Abstract

This paper illustrates the effect of market size on the decision of whether or not firms should vertically integrate or disintegrate. We use a model of two successive stages of production with Cournot competition in each stage. In this model, firms choose to specialize (either upstream or downstream) or to integrate the two stages, before making their production decisions. The decision of whether or not to integrate or specialize depends on the trade-off between "escaping from" the double marginalization problem or the gain from specializing in the production stage in which the firm is more efficient. We show (using simulations) that more firms choose to be vertically integrated as the valuation of the final product or the number of consumers increases, unless the number of firms increases proportionately.

Suggested Citation

  • Dufeu Ivan, 2004. "Market Size and Vertical Equilibrium in the Context of Successive Cournot Oligopolies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 4(1), pages 1-18, April.
    • Handle: RePEc:bpj:bejtec:v:topics.4:y:2004:i:1:n:2
    DOI: 10.2202/1534-598X.1122
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    Citations

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    Cited by:

    1. Noriaki Matsushima & Tomomichi Mizuno, 2007. "Why do large firms tend to integrate vertically? - asymmetric vertical integration reconsidered -," Discussion Papers 2007-34, Kobe University, Graduate School of Business Administration.
    2. Kensuke Kubo, 2011. "Explaining vertical integration in the generic pharmaceutical industry," Discussion Papers 11-02, Indian Statistical Institute, Delhi.
    3. Zanaj Skerdilajda, 2010. "Successive Oligopolies and Decreasing Returns," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-26, November.
    4. Yvan Dufeu, 2008. "Déterminants du choix d’intégration et de désintégration verticale des entreprises," Revue Finance Contrôle Stratégie, revues.org, vol. 11(1), pages 131-154, March.
    5. Zanaj Skerdilajda, 2010. "Successive Oligopolies and Decreasing Returns," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-26, November.
    6. Ivan Dufeu, 2008. "Déterminants du choix d’intégration et de désintégration verticale des entreprises," Post-Print hal-02815119, HAL.
    7. 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.
    8. Zhong-Yuan Han & Shu-Lin Wang, 2012. "Theory on the Functions of a Firm: A Resolution to Smith¡¯s Dilemma," Journal of Management and Strategy, Journal of Management and Strategy, Sciedu Press, vol. 3(1), pages 18-31, February.
    9. Buehler, Stefan & Schmutzler, Armin, 2008. "Intimidating competitors -- Endogenous vertical integration and downstream investment in successive oligopoly," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 247-265, January.

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