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Cost reducing strategies

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Abstract

We consider an industry where one of the manufacturers and its supplier (S) have engaged in some specific investment in the past. We assume that this has three consequences: S has lower expected production costs than other suppliers, supplier-switching costs exist, and the manufacturer may limit its rivals’ access to S. In the case when only S knows its true production costs, we compare alternative mechanisms to induce S to reveal its private information, namely, paying informational rents, using threats of switching suppliers, and most importantly, permitting S to serve other firms. We prove that the presence of asymmetric information mitigates the manufacturer’s incentives to engage in vertical restraints. We derive several policy implications from this result.

Suggested Citation

  • Pau Olivella & Maite Pastor, 2003. "Cost reducing strategies," Investigaciones Economicas, Fundación SEPI, vol. 27(1), pages 5-37, January.
    • Handle: RePEc:iec:inveco:v:27:y:2003:i:1:p:5-37
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    Keywords

    Adapting to more efficient suppliers; supplier switching costs; sharing suppliers; vertical restraints; asymmetric information;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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