Protecting weak suppliers in endogenous vertical structurer

Ryosuke Tsuritani

MPRA Paper from University Library of Munich, Germany

Abstract: In a vertical market, the price of the final good is high if a seller has strong bargaining power. Thus, a policy that strengthens the bargaining power of sub-suppliers may be desirable from a fairness perspective while undesirable from an efficiency perspective. We consider a vertical market with one sub-supplier, focal supplier, and manufacturer. 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 although suppliers' vertical separation induces triple-markup inefficiency in vertical relations, if the focal supplier has weak bargaining power over the manufacturer or strong bargaining power over the sub-supplier, the suppliers have the incentive to remain separated. This is because suppliers' vertical separation may be a price-increasing commitment and transfer the bargaining surplus from the manufacturer to the suppliers. Therefore, a policy that strengthens the bargaining power of sub-suppliers may also be justified from an efficiency perspective because it may encourage vertical integration.

Keywords: Vertical market; Vertical integration; Three-tier supply chain; Bargaining; Subcontracting Act (search for similar items in EconPapers)
JEL-codes: D42 L23 L40 (search for similar items in EconPapers)
Date: 2024-09-15
New Economics Papers: this item is included in nep-com, nep-cta, nep-gth, nep-ind, nep-mic and nep-reg
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