Procurement of advanced inputs and welfare-reducing vertical integration

Chul-Hi Park (), Toshihiro Matsumura and Sang-Ho Lee

Journal of Economics, 2022, vol. 135, issue 3, No 2, 255-283

Abstract: 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.

Keywords: Demand-enhancing inputs; Commitment to procure; Make-or-buy decision; CSR procurement (search for similar items in EconPapers)
JEL-codes: D43 L13 L41 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/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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