Partial Vertical Ownership in the Presence of Downstream Competition

32 Pages Posted: 30 Jan 2020 Last revised: 28 Jun 2021

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: June 27, 2021

Abstract

Firms sometimes acquire partial ownership of their upstream suppliers, which entails no direct control over the target firm’s decision-making. This paper studies the economic impacts of such partial vertical ownership (PVO) in a market with downstream competition, where a manufacturer supplies two competing retailers. We find that dividend payments between firms can alter firms’ incentives in their operational decisions and, hence, serve as an “invisible hand” to downstream competition and vertical interaction. We show that a higher PVO percentage can have both positive and negative effects because the acquiring retailer’s gain from PVO depends on not only its own sales but also the competitor’s sales. Thus, PVO has an inverted U-shaped effect on the acquiring retailer and the manufacturer’s total gain, which implies that an intermediate level of PVO percentage is preferred. Second, the relative strength of the positive and negative effects depends on the acquiring retailer’s competitive position. We show that the less competitive retailer can obtain more benefits from PVO than the more competitive retailer and, hence, the manufacturer prefers establishing PVO with the less competitive retailer. Lastly, consumers will benefit from the firms’ PVO relationship when the acquiring retailer is the more competitive retailer but may become worse off when the acquiring retailer is the less competitive retailer. Our research provides managers with some guidance on the optimal PVO relationship and policymakers with insights on regulating PVOs for consumer protection.

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

Suggested Citation

Fang, Fang and Jiang, Baojun and Sun, Jiong, Partial Vertical Ownership in the Presence of Downstream Competition (June 27, 2021). 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
68
Abstract Views
310
rank
404,307
PlumX Metrics