Vertical Enclosure: Vertical Integration and the Reluctance to Purchase from a Competitor

Heavner, D. Lee

doi:10.2139/ssrn.201888

Cited by 4 publications

(3 citation statements)

References 6 publications

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“…Another line of argument in favor of outsourcing runs as follows. A vertically integrated provider, which competes in the final product market, will have incentive to "hold up" its supply once investments have been sunk in the procurement process (Heavner, 2004). Furthermore there is the considerable risk that the business plans of the input-seeking firm will get revealed to its rival via the orders placed.…”

Section: Related Literaturementioning

confidence: 99%

Outsourcing induced by strategic competition

Chen¹,

Dubey²,

Sen³

2022

Preprint

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<p>We show that intermediate goods can be sourced to firms on the “outside” (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that “inside” firms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the final product. Thus they have incentive to quote high provider prices to ward off future competitors, driving the latter to source outside. </p>

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Section: Related Literaturementioning

confidence: 99%

Outsourcing induced by strategic competition

Chen¹,

Dubey²,

Sen³

2022

Preprint

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“…In a monopoly framework, with R&D, 5 private and public desirability of VI versus VD may be affected by transport and communication (TC) costs, country relative size, product differentiation—accompanied by inputs differentiation (Pepall and Norman, 2001)—and, finally, vertical restraints. For instance, if U is not allowed to sell inputs to other firms but its D section, the absence of any market stimulus (Heavner, 2004) may make U and the entire VI firm less efficient.…”

Section: Introductionmentioning

confidence: 99%

Pitfalls in Private and Social Incentives of Vertical Cross‐border Integration and Disintegration

Rossini

2007

Rev International Economics

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Production increasingly takes place on a cross-border basis along two patterns. Either a vertically integrated (VI) multinational firm (MNF) spreads the production sequence over many countries or vertically disintegrated (VD) firms operate independently in distinct stages and countries. On the private side, the decrease of transport costs expands VD, due to incentives alternatively in the upstream (U) and the downstream (D) sections of production. With VD the benefits are disseminated over many countries. With VI they are skewed towards a single area. Then, some countries prefer cross-border VD. In an international duopoly setting, with vertical restraints due to competition or trade policies, VD becomes the privately preferred mode and provides further ground for the wave of international fragmentation. Copyright � 2007 The Author; Journal compilation � 2007 Blackwell Publishing Ltd.

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“…There is a large literature that considers various strategic aspects of sourcing (see, e.g., Cachon and Harker (2002), Shy and Stenbacka (2003), Chen et al (2004), Heavner (2004), Chen (2005), Buehler and Haucap (2006), Arya et al (2008a,b), Chen et al (2009)). The paper most closely related to ours is Chen (2005), who argues that an integrated firm might have incentive to disintegrate in order to better exploit scale economies.…”

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confidence: 99%