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Vertical Disintegration: A Dynamic Markovian Approach
Author(s) -
Laussel Didier,
Van Long Ngo
Publication year - 2012
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2012.00345.x
Subject(s) - monopolistic competition , downstream (manufacturing) , subsidiary , upstream (networking) , markov chain , markov process , industrial organization , product (mathematics) , markov perfect equilibrium , queue , business , microeconomics , economics , computer science , mathematics , marketing , monopoly , finance , computer network , statistics , geometry , nash equilibrium , machine learning , multinational corporation , programming language
In a model where a monopolistic downstream firm (assembler) negotiates simultaneously with each of its intermediate‐input suppliers the prices of the complementary components which enter its product, we analyze the process by which the assembler separates from its suppliers as a Markov Perfect equilibrium. Due to a negative strategic effect (the prices and profits of independent suppliers decrease when their number increases), the assembler’s marginal return from keeping an upstream subsidiary is lower than the market value of an independent supplier. Separation is immediate when the downstream firm’s initial number of upstream subsidiaries is below a critical level. It is progressive in the reverse case and eventually leads to a mixed strategy whereby the assembler keeps all the remaining subsidiaries with some probability, and sells all them off in one go with the complementary probability.