Vertical Separation as a Defense against Strong Suppliers

We provide a simple model to investigate decisions about vertical separation. The key feature of this model is that more than one input is required for the final product of the downstream monopolist. We show that as the bargaining powers of independent complementary input suppliers grow larger, the downstream monopolist tends to separate from its input units. The results are related to a visible difference between the vertical structures of Japanese and US auto assemblers.

How do market structures affect decisions on vertical integration/separation?

We provide a simple model to investigate decisions on vertical integration/separation. The key feature of this model is that more than one input is required for the final products of the local downstream monopolists. Depending on their cost structure, downstream firms' decisions on vertical separation can be both strategic complements and strategic substitutes. As a result, the equilibrium number of vertically integrated firms depends on the cost structure. When the local downstream monopolists merge, vertical separation tends to appear in equilibrium. When an upstream firm can price discriminate, the downstream firms vertically separate. When the downstream firms compete with each other, vertical integration tends to appear if the degree of product differentiation is lower.

Market Size and Vertical Structure in the Railway Industry

We provide a theoretical framework to discuss the relation between market size and vertical structure in the railway industry. The framework is based on a simple downstream monopoly model with two input suppliers, labor forces and the rail infrastructure firm. The operation of the downstream firm (i.e., the train operating firm) generates costs on the rail infrastructure firm. We show that the downstream firm with a larger market size is more likely to integrate with the rail infrastructure firm. This is consistent with the phenomenon in the railway industry.

Regulation, competition, and liberalization

In many countries throughout the world, regulators are struggling to determine whether and how to introduce competition into regulated industries. This essay examines the complexities involved in the liberalization process. While stressing the importance of case-specific analyses, this essay distinguishes liberalization policies that generally are pro-competitive from corresponding anti-competitive liberalization policies

Markets for technology (why do we see them, why don't we see more of them and why we should care)

This essay explores the nature, the functioning, and the economic and policy implications of markets for technology. Today, the outsourcing of research and development activities is more common than in the past, and specialized technology suppliers have emerged in many industries. In a sense, the Schumpeterian vision of integrating R&D with manufacturing and distribution is being confronted by the older Smithian vision of division of labor. The existence and efficacy of markets for technology can profoundly influence the creation and diffusion of new knowledge, and hence, economic growth of countries and the competitive position of companies. The economic and managerial literatures have touched upon some aspects of the nature of these markets. However, a thorough understanding of how markets for technology work is still lacking. In this essay we address two main questions. First, what are the factors that enable a market for technology to exist and function effectively? Specifically we look at the role of industry structure, the nature of knowledge, and intellectual property rights and related institutions. Second, we ask what the implications of such markets are for the boundaries of the firm, the specialization and division of labor in the economy, industry structure, and economic growth. We build on this discussion to develop the implications of our work for public policy and corporate strategy

Is Antitrust\u27s Consumer Welfare Principle Imperiled?

Antitrust’s consumer welfare principle stands for the proposition that antitrust policy should encourage markets to produce output as high as is consistent with sustainable competition, and prices that are accordingly as low. Such a policy does not protect every interest group. For example, it opposes the interests of cartels or other competition-limiting associations who profit from lower output and higher prices. It also runs counter to the interest of less competitive firms that need higher prices in order to survive. Market structure is relevant to antitrust policy, but its importance is contingent rather than absolute – that is, market structure is a concern when it facilitates reduced output or innovation or leads to higher prices. Antitrust’s consumer welfare principle is currently navigating between two hazards, both of which threaten the importance of low prices as an antitrust goal. On the right is a general welfare approach best identified with Robert Bork that would permit efficiency claims as an antitrust defense even when the challenged practice leads to higher prices and causes consumer harm. On the left is an emergent “neo-Brandeisian” approach that often regards low prices as the enemy, at least when they come from large firms at the expense of higher cost rivals. In both cases, the full story is more complex. The general welfare approach as Robert Bork presented it was built on a strong faith that various practices produced cost savings or other efficiencies, whether or not these were provable, as well as considerable doubt that a large menu of practices caused genuine competitive harm. In the process it also approved an approach to antitrust that was very difficult to administer and underdeterrent over a wide range of practices. By contrast, a central claim of the Neo-Brandeis approach is that markets are fragile, threatening monopoly nearly everywhere. Further, antitrust policy should be driven more by political theory rather than economics. While political voices are diverse, making it difficult to identify a single theme, one clear consequence is greater protection for small business. For example, they point with admiration to some of antitrust’s greatest acknowledged disasters, such as the Robinson-Patman Act. One serious problem facing the neo-Brandeis movement is lack of transparency. The attack on low prices as a central antitrust goal will harm consumers, and vulnerable consumers are most at risk. To the extent that the United States Democratic Party becomes the institution to embrace its concerns, it will be harming its own constituencies the most, and that could spell political suicide