Procurement of Advanced Technology and Welfare-Reducing Vertical Integration

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

MPRA Paper from University Library of Munich, Germany

Abstract: This article presents a model in which two downstream firms compete in a differentiat-ed product market and choose whether to adopt new advanced inputs supplied by the monopolist, while standard inputs are competitively supplied. When the monopoly sup-plier is independent, from the welfare viewpoint, the incentive to adopt the new inputs is insufficient (can be excessive) given that the rival does not adopt (adopts). When the monopoly supplier and one downstream firm merge, such integration increases the un-integrated downstream firm’s incentive to adopt the new input supplied by the rival and thus helps the spread of new inputs in the industry. However, because of the collusive effect of increasing the prices of the final products, vertical integration can be harmful for welfare despite the reduction in the welfare loss due to double marginalization and the increase in product quality.

Keywords: demand-enhancing inputs; commitment to procure; make-or-buy decision; CSR pro-curement (search for similar items in EconPapers)
JEL-codes: D43 L13 L41 (search for similar items in EconPapers)
Date: 2017-05-05
New Economics Papers: this item is included in nep-bec, nep-com and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:79109

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