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Procurement of advanced inputs and welfare-reducing vertical integration

Author

Listed:
  • Chul-Hi Park

    (Chonnam National University)

  • Toshihiro Matsumura

    (The University of Tokyo)

  • Sang-Ho Lee

    (Chonnam National University)

Abstract

This article presents a model in which two downstream firms compete in a differentiated product market and choose whether to adopt new advanced inputs supplied by the monopolist or competitively supplied standard inputs. When the downstream firms are independent of the monopolistic supplier, from the welfare viewpoint, the incentive to adopt the new inputs is insufficient (can be excessive) given that the rival firm does not (does) adopt. When the monopoly supplier and one downstream firm merge, such integration increases the unintegrated downstream firm’s incentive to adopt the new input supplied by the rival, spreading new inputs in the industry. We emphasize the price-increasing effect under the commitment to procure advanced inputs and show that vertical integration can be harmful to welfare despite the increase in product quality and the reduction in the welfare loss due to double marginalization.

Suggested Citation

  • Chul-Hi Park & Toshihiro Matsumura & Sang-Ho Lee, 2022. "Procurement of advanced inputs and welfare-reducing vertical integration," Journal of Economics, Springer, vol. 135(3), pages 255-283, April.
    • Handle: RePEc:kap:jeczfn:v:135:y:2022:i:3:d:10.1007_s00712-021-00759-3
    DOI: 10.1007/s00712-021-00759-3
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    References listed on IDEAS

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    Cited by:

    1. Xu, Lili & Lee, Sang-Ho, 2024. "Port supply chain integration under mixed ownership," Transport Policy, Elsevier, vol. 146(C), pages 371-385.

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    More about this item

    Keywords

    Demand-enhancing inputs; Commitment to procure; Make-or-buy decision; CSR procurement;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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