The economic analysis of product substitutability and intimidation effect on vertical integration

Yu-Chieh Chang and Shu-Yi Liao
Additional contact information
Yu-Chieh Chang: Department of Applied Economics, National Chung Hsing University, Taichung, Taiwan
Shu-Yi Liao: Department of Applied Economics, National Chung Hsing University, Taichung, Taiwan

Journal of Administrative and Business Studies, 2019, vol. 5, issue 4, 206-218

Abstract: This study applied the modified Cournot duopoly model proposed by Buehler and Schmutzler (2008) and Milliou and Pavlou (2013) to analyze and compare the economic efficiency of the separation model and vertical integration model. For the industry of downstream Research and Development (R&D), this model examines the effect of market size and product substitutability on the economic output. We establish the following results: (i) the benefits of a downstream firm on vertical integration will increase when the product substitutability is lower. (ii) While the market size becomes bigger, the benefit is further enhanced this conclusion. The integration firm will promote investment in R&D to cause intimidation effect. (iii) When the product substitutability is higher to a certain degree, the benefits will also increase. Thus, high degree of product homogeneity and high degree of product heterogeneity are more suitable for vertical integration. In the long run, the industry which will extend or increase in demand suggests a merger as early as possible.

Keywords: Downstream R&D; Vertical integration; Product substitutability; Intimidation effect; Economic effect (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://tafpublications.com/platform/Articles/full-jabs5.4.2.php (application/pdf)
https://tafpublications.com/gip_content/paper/Jabs-5.4.2.pdf (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:apb:jabsss:2019:p:206-218

DOI: 10.20474/jabs-5.4.2

Access Statistics for this article

Journal of Administrative and Business Studies is currently edited by Professor Dr. Usman Raja

More articles in Journal of Administrative and Business Studies from Professor Dr. Usman Raja Calle Alarcon 66, Sant Adrian De Besos 08930, Barcelona Spain.
Bibliographic data for series maintained by Professor Dr. Usman Raja ().