Protecting Weak Suppliers in Endogenous Vertical Structure

Ryosuke Tsuritani ()
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Ryosuke Tsuritani: Kobe University

Journal of Industry, Competition and Trade, 2025, vol. 25, issue 1, No 21, 18 pages

Abstract: Abstract Considering a three-tier supply chain with a sub-supplier, a focal supplier, and a manufacturer, we explore the policy implications of legal measures designed to protect suppliers with weak bargaining power, such as abuse of a superior bargaining position. The focal supplier purchases inputs from the sub-supplier and sells its products to the manufacturer. Suppliers’ selling prices are determined through Nash bargaining. We find that the suppliers remain separated when the focal supplier has weak bargaining power over the manufacturer or strong bargaining power over the sub-supplier. This is because upstream vertical separation makes the focal supplier inefficient and may increase its distributed surplus in Nash bargaining with the manufacturer. This result explains why multi-tier supply chains exist even if the legal protection for weak suppliers exists, and further justifies the policy interventions that strengthen the bargaining power of sub-suppliers in such supply chains, as these interventions may encourage upstream vertical integration.

Keywords: Vertical market; Vertical integration; Three-tier supply chain; Bargaining; Subcontract Act (search for similar items in EconPapers)
JEL-codes: D42 L23 L40 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10842-025-00456-7

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