Buying Back Subcontractors: The Strategic Limits of Backward Integration

Didier Laussel ()

Journal of Economics & Management Strategy, 2008, vol. 17, issue 4, 895-911

Abstract: In a model where a monopolistic downstream firm (assembler) negotiates simultaneously with each of its n subcontractors the prices of the complementary components which enter its product, we show that backward integration is limited by a strategic negative effect: the prices and profits of independent suppliers increase when a merger reduces their number. Mergers are profitable only if the downstream firm buys at least two thirds of its suppliers. In an endogenous acquisition game à la Kamien and Zang (1990) the only merged equilibrium occurs when there is only one subcontractor. In a sequential acquisition game full integration is not an equilibrium when the number of suppliers is at least five.

Date: 2008
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https://doi.org/10.1111/j.1530-9134.2008.00199.x

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