Block Ownership in Vertical Relationships in the Presence of Downstream Competition
26 Pages Posted: 30 Jan 2020
Date Written: December 10, 2019
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
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