Block Ownership in Vertical Relationships in the Presence of Downstream Competition

26 Pages Posted: 30 Jan 2020

See all articles by Fang Fang

Fang Fang

California State University, Los Angeles

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

Jiong Sun

Purdue University - Department of Consumer Sciences and Retailing

Date Written: December 10, 2019

Abstract

It is a popular practice for firms to acquire a block share of their manufacturers’ ownership. This paper studies the economic impacts of such partial vertical ownership (PVO) in the presence of downstream market competition. Prior studies of vertical integration suggest that firms benefit from full ownership due to reduced double marginalization. We show that, in the presence of downstream competition, a larger PVO size can play both positive and negative roles. This creates an inverted U-shaped effect on acquiring and target firms’ total gain from PVO, which implies that both acquiring and target firms prefer an intermediate PVO size. Second, this most preferred PVO size decreases with downstream-competition intensity when the acquiring firm is a high-value firm but increases when it is a low-value firm. Moreover, consumers benefit from a high-value firm’s PVO, but may suffer from a low-value firm’s PVO. This study offers managers guidance on the optimal passive PVO and also provides policymakers insights on regulating PVOs for consumer protection.

Keywords: partial vertical ownership; distribution channel; competition; game theory

Suggested Citation

Fang, Fang and Jiang, Baojun and Sun, Jiong, Block Ownership in Vertical Relationships in the Presence of Downstream Competition (December 10, 2019). Available at SSRN: https://ssrn.com/abstract=3501303 or http://dx.doi.org/10.2139/ssrn.3501303

Fang Fang

California State University, Los Angeles ( email )

United States
3233432800 (Phone)

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

Jiong Sun (Contact Author)

Purdue University - Department of Consumer Sciences and Retailing ( email )

West Lafayette, IN 47907
United States

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