Spatial Successive Oligopoly and Partial Vertical Integration in a Distribution System

Abstract

This paper models the distribution system as vertically related activities under spatial successive oligopoly.The retail market is characterized by a uniform and discrete distribution of intralocal concentrations of retailers along a linear market. Manufacturers are considered as wholesalers located arbitrarily along the linear (or over a plain) market and they can make sales to all local market points. The retailers are subject to competition at its own site as well as at a location some distance away while wholesalers are spatial Cournot oligopolists.Profit maximization condition for the upstreamers is based on the profit maximizing equilibrium conditions for the downstreamers since the marginal revenue function of the ratailer constitutes the average revenue function of the wholesaler. Therefore, resulting equilibrium conditions for the two vertically related markets determine the equilibrium output and retail price. Spatial competition in the retail market causes a change in equilibrium conditions for the downstreamers, which in turn induces a change in equilibrium conditions for the upstreamers while spatial competition and cost coditions in the wholesale market affect the latter equilibrium conditions directly.If the basic demands yield monotonically increasing (decreasing) elasticities with distance, smaller market area yields lesser (greater) elasticity of aggregate demand. Despite the same curvature of the basic demand, elasticity of the first derivative of aggregate demand does not necessarily decrease (increase) as market size decreases. Therefore, greater interlocal competition in the retail market may raise or lower the retail price and consumer surplus per unit area depending on the directions of changes in two types of elasticities. In contrast, greater intralocal competition yields lower retail price and greater consumer surplus per unit area due to the second curvature condition. Likewise, factors such as greater spatial competition in the wholesale market, lower marginal cost of production, lower transportation cost per unit of quantity and smaller total market area tend to lower retail price, thereby increasing consumer surplus per unit area.We expand Greenhut-Ohta [5] model to ponder some cases of vertical integration by spatial successive oligopolists when one upstreamer integrates with one or more downstreamers and moreover integrated enterprises can continue to offer independent downstreamers wholesale goods. We demonstrate that industry output is greater while both retail price and wholesale price are lower when partial vertical integration is contemplated than when independent retailers are allowed to purchase from independent manufacturers only.