Cost reducing strategies

Pau Olivella and Maite Pastor
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Maite Pastor: Centro de Estudios Universitarios San Pablo, https://www.uch.ceu.es

Investigaciones Economicas, 2003, vol. 27, issue 1, 5-37

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.

Keywords: Adapting to more efficient suppliers; supplier switching costs; sharing suppliers; vertical restraints; asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 L13 L42 (search for similar items in EconPapers)
Date: 2003
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Working Paper: Cost Reducing Strategies (1997)
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