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We provide a model to investigate vertical integration decisions. This model assumes that local downstream manufacturers require two inputs to make their final products. One input is produced by a supplier shared by both manufacturers; another is produced by an exclusive supplier for each manufacturer. We show that vertical integration of each downstream firm with its exclusive supplier enhances the input demand for the common supplier, leading to an increase in the common supplier's input price due to the elimination of the double marginalization. Moreover, downstream firms that require a smaller quantity of inputs from the common supplier, for instance, those with efficient production technology or smaller downstream demand, are more likely to vertically integrate because vertical integration yields a smaller increase in input price. Thus, the cause of firm-size heterogeneity is important to consider when investigating the relationship between firm size and the tendency to vertically integrate.

a b s t r a c tMatsushima, Noriaki, and Mizuno, Tomomichi-Profit-enhancing competitive pressure in vertically related industries Under a simple Cournot model with vertical relations, when downstream firms engage in process R&D, the profits of input suppliers for which upstream competition exists may be larger than those in which each input supplier has a bilateral monopoly relation with its buyer (downstream firm). This is because upstream competition leads to higher levels of investment by the downstream firms. Furthermore, we incorporate the decisions of downstream firms to acquire the ability to procure input from potential outside suppliers, which has the effect of placing competitive pressure on existing input suppliers. We show that no downstream firm acquires such an ability to procure its input from potential outside suppliers in some cases although the acquisition could benefit the input suppliers. J. Japanese Int. Economies 26 (1) (2012) 142-152.

Under Bertrand competition, sequential pricing weakens competition and provides larger profits than those with simultaneous pricing. In contrast, under Cournot competition, simultaneous play is less competitive than sequential play. Therefore, sequential pricing occurs in equilibrium under Bertrand competition, whereas simultaneous play is an equilibrium under Cournot competition (Hamilton & Slutsky, 1990). This study challenges both well-known results by introducing upstream advertising.More formally, we consider a simple four-stage game played by a manufacturer and two retailers producing differentiated products. In the first (pre-play) stage, retailers play observable delay game (Hamilton & Slutsky, 1990). In the second stage, the manufacturer invests in advertising that affects the size of retailers' markets. In the third stage, the manufacturer sets the wholesale price. In the final stage, retailers set unit prices under Bertrand competition (quantities under Cournot competition) either simultaneously or sequentially, depending upon their moves in the first stage.