HORIZONTAL MERGERS FOR BUYER POWER

Salant et al. (1983) showed in a Cournot setting that horizontal mergers are unprofitable because outsiders react by increasing their output. We show that this negative effect may be compensated by the positive effect that horizontal mergers have on the buyer power of merging firms in input markets.buyer power; mergers; input markets.

PARTIAL PRICE DISCRIMINATION BY AN UPSTREAM MONOPOLIST

We analyze third degree price discrimination by an upstream monopolistto a continuum of heterogeneous downstream firms. The novelty of ourapproach is to recognize that customizing prices may be costly, whichintroduces an interesting trade-off. As a consequence, partial pricediscrimination arises in equilibrium. In particular, we show that inefficientdownstream firms receive personalized prices whereas efficient firms arecharged a uniform price. The extreme cases of complete price discriminationand uniform price arise in our setting as particular cases, depending on the costof customizing prices.Price discrimination, input markets

DIVISIONALIZATION IN VERTICAL STRUCTURES

We study the incentives to create divisions by a firm once it is taken into account the vertical structures of an industry. Downstream firms, that must buy an essential input to upstream firms, may create divisions. Divisionalization reduces their bargaining power against upstream firms. This effect must be weighted against the usual incentive to divisionalize, namely the increase in the share of the final market that a firm obtains through it. We show that incentives to divisonalize are severely reduced when compared with the standard results, and that even sometimes firms choose not to divisionalize at all. The paper also shows the implications of the former analysis on the internal organization of firms and on the incentives to vertically integrate.

Per-unit versus ad-valorem royalty licensing in a Stackelberg market

We consider licensing of a non-drastic innovation by a licensor that interacts with a potential licensee in a Stackelberg duopoly, comparing per-unit and ad-valorem royalty two-part contracts and showing why and when each licensing deal should be used. We contribute three findings to the literature. First, ad-valorem royalty is preferred when the licensor plays as leader in the marketplace, but per-unit royalty is preferred when the licensor plays as follower. Second, only innovations that do not hurt consumers are socially beneficial. Third, our model also suggests that both the licensor’s status as a leader or follower in the marketplace and the innovation size determine the incentive to engage in innovative activitiesOpen Access funding provided thanks to the CRUE-CSIC agreement with Springer Nature. Manel Antelo acknowledges financial support from Consellería de Cultura, Educación e Ordenación Universitaria (Xunta de Galicia) through Grant GRC 2019 and Lluis Bru from the Ministerio de Economía e Innovación (Gobierno de España) (ECO2017) through Grant PID2020-115018RB-C33. Beyond this, the paper received no specific grant from any funding agency in the public, commercial, or non-profit sectorsS

Option contracts in a vertical industry

We examine, in a vertical industry, the strategic role of horizontal subcontracting through option contracts by a downstream dominant firm competing with a competitive fringe. Downstream production requires an input from an upstream component-producing industry composed of imperfectly competitive suppliers. We characterize how the dominant firm may outsource downstream production from fringe firms in order to gain bargaining clout in the upstream input market. It is shown that option contracts are preferred to fixed-quantity forward contracts, because leverage against upstream suppliers is gained at lower contract prices. When there is no market uncertainty option contracts do not alter spot prices beyond that caused by unavoidable market power, whereas they increase price volatility whenever demand is subject to uncertainty

Licensing a product innovation from an external innovator to a Stackelberg duopoly

We study the licensing of a product innovation from an external innovator in a duopoly of firms that compete sequentially with each other through quantities or prices. We find that the innovation is only licensed to a single firm, regardless of market competition. However, both the licensee and contractual terms under quantity competition differ from those under price competition. In the first case, the innovation is licensed to the market-leading firm through a non-distorting contract, and in the second case, to the market-following firm by means of a two-part tariff (distorting) contract involving a per-unit royalty

Buyer groups, preferential treatment through key account management, and cartel stability

This paper examines why some customers may want to create a buyer group (BG), and why key account management (KAM) may be a tool for the seller to deal with BG members separately from customers that remain outside the BG. We find that both actions are related and explain each other. The implementation of a KAM program makes it advantageous for some customers to belong to a BG, eliminating the inherent instability that would otherwise plague the BG. Simultaneously the formation of a BG leads the seller to resort to a KAM approach so as to segment the market and charge higher prices to customers remaining outside the group. The seller’s commitment problem is then highlighted

Horizontal contracts in a dominant firm-competitive fringe model

This paper offers a rationale for production subcontracting by a market power firm from smaller firms despite the latter’s ability to sell the good for themselves. Particularly, in a dominant firm (DF) model in which the good can be sold through linear pricing or through nonlinear two-part tariff (2PT) contracts, we demonstrate that the DF finds it optimal, whenever it sells its own production plus outsourced production, to subcontract production from fringe firms by setting nonlinear 2PT contracts

Strategic delegation in procurement

In a firm organized into business units, we show when profitability increases if procurement is delegated to the division in charge of production. We highlight that our results are driven by the business unit having a different objective function than Headquarters. The profitability of procurement delegation is affected by the essentiality of production facilities to the activities of the firm, and by strategic distortions in both transfer and input prices. We also look at vertical separation of activities as an alternative to procurement delegation

A note on the impact of the internal organization on the accuracy of the information transmitted within the firm

We investigate the incentives sales managers have to transmit information on demand conditions to headquarters under different organizational structures, and its subsequent impact on firm performance. When headquarters chooses quantities, their interests are aligned and reliable information is transmitted. When the choice of quantities is delegated to the sales manager, instead, he prefers not to transmit reliable information and as a consequence, headquarters set transfer prices having poor information about demand. We then see that, due to this difference in the quality of the information available to headquarters, the centralized organization frequently has the best performance