Value Capture In Hierarchically Organized Value Chains

Abstract

Today, value chains design and produce most goods and the value captured as a whole is distributed among the chain’s members through bargaining. For complex products, typically comprises several individual negotiations structured according to the hierarchical organization of the respective industry. We introduce the notion of bargaining to describe the sequence and participants of these individual negotiations. Using cooperative game theory--in particular the Shapley value and extensions of it--we show how structure affects the distribution of value among the constituent firms of the value chain. We find that positions in the structure most conducive to value capture are those where large complementarity gains are realized and split, ideally, among a small number of negotiators. Since the structure of a value chain is to some extent malleable, each member firm has an incentive to shape it in such a way as to optimize its own value capture. We suggest...