Strategic Separation from Suppliers of Vital Complementary Inputs: A Dynamic Markovian Approach

Posted by D. Daniel Sokol

Didier Laussel (Groupement de Recherche en Économie Quantitative d'Aix-Marseille (GREQAM)) and Ngo Van Long (McGill) discuss Strategic Separation from Suppliers of Vital Complementary Inputs: A Dynamic Markovian Approach.

ABSTRACT: In a model where a monopolistic downstream firm (assembler) negotiates simultaneously with each of its intermediate-input suppliers the prices of the complementary components which enter its product, we analyze the process by which the assembler separates from its suppliers as a Markov Perfect equilibrium. Due to a negative strategic effect (the prices and profits of independent suppliers decrease when their number increases), the assembler's marginal return from keeping an upstream subsidiary is lower than its market value as an independent supplier. Separation is immediate when the downstream firm's initial number of upstream subsidiaries is below a critical level. It is progressive in the reverse case and eventually leads to a mixed strategy whereby it keeps all the remaining subsidiaries with some probability, and sells all them off in one go with the complementary probability.