Premium
When to Initiate an International Vertical Merger? The Impact of Negative Demand Shock
Author(s) -
Li Jie,
Huang Xianhai
Publication year - 2013
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12087
Subject(s) - downstream (manufacturing) , upstream (networking) , upstream and downstream (dna) , shock (circulatory) , vertical integration , industrial organization , economics , product (mathematics) , product differentiation , incentive , market structure , business , welfare , market economy , operations management , medicine , computer network , geometry , mathematics , computer science
This paper develops an extended H otelling‐type product and technology‐differentiated model with two upstream and two downstream firms. The US upstream (respectively downstream) firm is technologically more advanced than the C hinese upstream (respectively downstream) firm. The locations of the upstream firms and the US downstream firm are fixed, and the C hinese downstream firm chooses its product location. The downstream firms compete with each other in US market. We aim to explore the conditions under which an international vertical merger between the C hinese downstream firm and the US upstream firm occurs and its welfare implications. We show that the incentive for the C hinese downstream firm to initiate a technology‐acquiring international vertical merger crucially depends on the market conditions of the U nited S tates. As compared to exporting or domestic vertical merger, international vertical merger is by no means an optimal choice for the C hinese downstream firm when there is no negative demand shocks to US market. This result remains to hold when the US downstream firm also has the option of initiating a merger with the US upstream firm. Nevertheless, in the case of a negative demand shock, a profitable international vertical merger may occur. However, such mergers worsen the social welfare of the U nited S tates.