Self-Sabotage

Abstract

We analyze the incentives of a vertically-integrated producer (VIP) to engage in “self-sabotage”.Self-sabotage occurs when a VIP intentionally increases its upstream costs and/or reduces the quality of its upstream product. We identify conditions under which self-sabotage is profitable for the VIP even though it raises symmetrically the cost of the upstream product to all downstream producers and/or reduces symmetrically the quality of all downstream products. Under specified conditions, self-sabotage can enable a VIP to disadvantage downstream rivals differentially without violating parity requirements. Copyright Springer Science+Business Media, Inc. 2005regulation, parity, sabotage,

Input Markets and the Strategic Organization of the Firm

“…Prominent examples include the strategic choice of incentive pay stressed in Fershtman and Judd (1987) and Sklivas (1987); the strategic use of transfer pricing in Alles and Datar (1998); strategic consequences of relative performance evaluation in Aggarwal and Samwick (1999); and strategic self-sabotage to soften competitive response in Sappington and Weisman (2005). In these research streams, a unifying theme arises stressing that the strategic view of firm organization and the measurement of the performance of various firm components are inextricably linked.…”

Bad Government Can Be Good Politics: Political Reputation, Negative Campaigning, and Strategic Shirking

“…Examples of the first, where self-sabotage ---analogous to shirking ---directly harms the rival, are Williamson (1968) and Sappington and Weisman (2005). Williamson shows that a firm may increase its own costs by agreeing to a high-wage union contract that binds not only itself but also rivals that are harmed even more by the higher wages.…”

Network neutrality and the nature of competition between network operators

“…Indeed, customers can walk Sappington and Weisman (2005) and Mandy and Sappington (2004) present the incentives for increasing network costs and degrading application quality in a monopoly market with vertically integrated firm. Mandy and Sappington also show that quality degradation may lead to increasing profit if quality matters for consumers, but to decreasing demand, prices and profit if consumers make their decision according only to price.…”

“…We rely on standard insights from the theory of industrial organization (Tirole 1988); the economics of network industries (Shy 2002); and research on the economics of sabotage in vertically integrated market (Mandy and Sappington 2004;Sappington and Weisman 2005). There exist some economics papers on network neutrality, for instance van Schewick (2007), Ford et al (2006), and Hahn and Wallsten (2006), although they use little or no economic modeling.…”