Endogenous residual claimancy by vertical hierarchies

The strategic value of partial vertical integration

“…In this case, M 1 secretly offers R 1 a contract of the form ρ θ 1 , t 1 θ 1 , p 1 θ 1 . It follows from Piccolo et al (2014) that partial vertical integration can still emerge in this alternative scenario. This occurs when R 1 's profits directly depend on the ownership stake ρ, and a higher ρ induces R 1 to internalize to a larger extent the hierarchy's joint profits.…”

“…In a model with competing manufacturer-retailer pairs, Martimort and Piccolo (2010) and Kastl et al (2011) show that manufacturers may strategically prefer quantity fixing to resale price maintenance and explore the welfare consequences of these contractual relationships. Piccolo et al (2014) investigate the allocation of residual claimancy in a setting with competing principal-agent hierarchies and demonstrate that a principal may find it optimal to retain a share of surplus from production with an inefficient agent because this reduces the mimicking incentives of the efficient agent. Our paper provides novel insights into the interaction between competition and the organizational structure of vertically related firms, and shows that a manufacturer can prefer to partially integrate with its retailer since the partial internalization of the retailer's rents leads to a dampening of competition.…”

“…Following Piccolo and Pagnozzi (2013) and Piccolo et al (2014), the vector of the retail costs (θ 1 , θ 2 ) is drawn from a joint cumulative distribution function such that Pr (θ l , θ l ) = ν 2 + µ,…”