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WHY DO LARGE FIRMS TEND TO INTEGRATE VERTICALLY?
Author(s) -
Matsushima Noriaki,
Mizuno Tomomichi
Publication year - 2012
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.2012.00433.x
Subject(s) - complementarity (molecular biology) , vertical integration , downstream (manufacturing) , industrial organization , product differentiation , upstream (networking) , business , product (mathematics) , microeconomics , economics , marketing , computer science , cournot competition , telecommunications , mathematics , genetics , geometry , biology
We provide a theoretical framework to discuss the relation between firm size and vertical structures. The framework is based on a Hotelling model with three downstream and three upstream firms. We show that vertical integration enhances the degree of product differentiation and show the strategic complementarity of product positioning. We also show that the downstream firm that has the largest market share is more likely to integrate vertically. Enhancing the degree of product differentiation is more beneficial for the large firm than for the rest of the downstream firms because the large firm supplies a large amount of product.