Halonen, Maija-Liisa Kristiina
(1994)
On the theory of vertical integration.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis explores vertical integration in both competitive and noncompetitive settings. Chapter 2 shows that allocation of ownership matters even in a repeated relationship. The optimal control structure of the static game restricts the gain from deviation to be the lowest but also the punishment will be minimal. The worst ownership structure of the one-shot game is good in the repeated setting because it provides the highest punishment but bad because the gain from deviation is also the highest. We show that two types of equilibria exist: one where partnership and a hostage type solution are optimal and second where the results of the one-shot game apply. Chapter 3 focuses on vertical oligopolies when both integrated and unintegrated firms coexist. We analyse the integrated firm's strategy in the input market. If the integrated firm is more efficient in transforming the input into final good, it will buy some input to drive up rival's marginal cost. Only if the integrated firm is less efficient will it sell input. If there is no competition in the final good market vertical supply arises because it has no harmful effects on the downstream unit's profits. If competition is very tough overbuying will emerge; by raising rival's costs the integrated firm can achieve a dominant position in a highly competitive market. Chapter 4 examines integration decisions of successive duopolists. We show that qualitatively the same pattern of integration emerges whether there is Cournot or Bertrand competition in the input market. We find that the degree of integration in the industry is increasing in the size of the downstream market. There is a tendency for partial integration when one upstream firm is relatively efficient compared to its rival. Chapter 5 takes into account both the firm's internal and external environment. Further, we explicitly model the effect of varying the degree of market competition. We observe a non-monotonic relationship between ownership allocation and competition. We also see greater upstream ownership of assets when the upstream worker is important.
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