Downstream Market Research Articles

Equilibrium vertical structure with a common supplier

AbstractWe consider a vertically related market, in which each downstream firm produces a differentiated product by assembling a key input produced by a common supplier and another input produced by a dedicated upstream firm. On the one hand, vertical integration has the advantage of inducing the common supplier to set a lower input price, but the disadvantage of reducing downstream firms' competitiveness in the downstream market. On the other hand, vertical separation has the advantage of increasing downstream firms' competitiveness in the downstream market but the disadvantage of inducing the common supplier to set a higher input price. Contrary to results of previous studies, we find that the existence of a common supplier can lead to vertical integration under Cournot competition, which emerges as a unique equilibrium when a common supplier adopts input discrimination. Although vertical integration is better for the individual firms, it reduces the total welfare. Even when the common supplier uses uniform input pricing, vertical integration also emerges in equilibrium.

General-Purpose AI Models as Essential Inputs in Downstream Markets: The Need for a Strict Standard Regarding Mandatory Access

Abstract General-purpose AI models have emerged as a disruptive technology with paramount spillover economic effects across industries. The owners of such models, namely big tech enterprises, can leverage their dominance in general-purpose AI models to expand into existing or new downstream markets. However, competition law is poised to constrain this expansion effectively. Nevertheless, there is uncertainty about the legal standard when assessing a refusal to deal in the case of access to general-purpose AI models. While EU competition law judicial practice reveals an adversary tendency against big tech enterprises leveraging in downstream markets, there is a case for adopting a narrower standard regarding access to general-purpose AI models.

Risk spillover effect of the new energy market and its hedging effectiveness: New evidence from industry chain

During China’s industrial transformation, studying risk spillover effects and clarifying risk contagion pathways within the new energy industry chain is critical for promoting high-quality development in the new energy. The risk transmission mechanism of the new energy industry chain is explored by constructing a time–frequency index using a time-varying parameter vector autoregressive model in this paper. Additionally, we also further analyze the portfolio and hedging effectiveness of the new energy market. The findings reveal that, first, the downstream market serves as the primary risk source, propagating risk through the industry chain to the midstream and upstream sectors within the new energy industry chain contagion system. Second, the risk spillover effect of the new energy market has significant heterogeneity and time-varying due to the impact of short-term frequency domain drivers and extreme events. Third, the portfolio significantly reduces the investment risk of a single asset. With the extension of the investment horizon, investors’ portfolio weights in the upstream, midstream and downstream industries gradually tend to be even.

The “objective test” and the downstream market presence requirement in Big Data access cases under the essential facilities doctrine - a critical assessment

One possible way to gain access to competitively relevant sets of Big Data is toapply the essential facilities doctrine. However, the European Commission and theEuropean Court of Justice have established several different criteria for applying thedoctrine. Since neither institution has yet applied the doctrine in Big Data accesscases, it is not clear which of the criteria applies in such positions. This paper attemptsto analyze the impact of the “objective test” and the requirement that the controllingcompany be active in the downstream market (which are included in all assessmentcriteria) in Big Data access cases, with the goal of answering the research question,“Do the application of the “objective test” and the requirement that the controllingcompany be active in the downstream market impede the effectiveness of the doctrinein Big Data access cases under EU competition law, and if so, how should they bechanged?” The conclusion is that in Big Data access cases, the “objective test” shouldbe mitigated and replaced by the “subjective test” or the “average company test” andthe requirement that the controlling company be active in the downstream marketshould be discarded altogether in order for the doctrine to be an effective tool foraccessing competitively relevant sets of Big Data.

Regulating data sales: The role of data selling mechanisms

We analyze the effects of different data selling mechanisms of a monopolistic Data Broker (DB) who sells consumer data to firms in a downstream market with free entry, where data can be used for consumer price discrimination. We consider three possible data selling mechanisms, namely auctions with and without reserve prices, and Take-It-Or-Leave-It offers, which exhibit decreasing levels of DB’s bargaining power towards firms. We highlight the emergence of an entry barrier effect in the downstream market, regardless of the data selling mechanism. Moreover, we show that the auction-based selling mechanisms, and particularly the auction with reserve prices, induce the DB to sell the lowest quantity of data, implying the lowest level of consumer surplus. Conversely, under TIOLI, the DB floods the market for data, selling to all firms data partitions that overlap over subsets of consumers. Imposing the sale of non-overlapping partitions to all firms would improve consumer surplus and welfare.

The value of membership service sharing in the e-commerce marketplace

Many firms have introduced membership programs as an important customer service initiative. However, little research has focused on how to enforce e-commerce retailing through membership service sharing. To explore the value of membership service sharing in e-commerce retailing, we build a game-theoretical model in which the brand decides whether to enable e-commerce retailing through online direct selling, and then all participants determine whether to engage in membership program sharing. Our findings show that in the case with a low consumer acceptance to the e-commerce channel, the brand will enter the downstream market if the entry cost and product cost are low, or the entry cost is low and the unit cost of the product is very high. One of the interesting findings is that the brand might fall into the encroachment trap when the product cost is moderate. Meanwhile, improving consumer acceptance of the e-commerce channel or the ratio of point exchange are effective ways to escape this trap. Moreover, when consumers are more willing to accept the e-commerce channel, the brand will adopt an e-commerce retailing strategy if the entry cost is low. Also surprisingly, our study shows that the brand would be better off from membership service sharing if the product cost is moderate, or very high, while the retailer would be worse off. Furthermore, when the unit cost of the product is moderate, membership program sharing has a remarkable impact on the brand’s retailing strategy. In addition, we also make some extensions to verify the robustness of the core model.

Double markups under bilateral vertical contracting

This paper examines price markups at the upstream and downstream levels of a bilateral vertical structure in which firms provide essential inputs to one another and engage in price competition in the downstream market. We show that the ratios of noncooperative equilibrium markups are primarily determined by the price elasticities of demand and the retail pass-through rates and, moreover, that coordination on input prices leads to a collusive equilibrium outcome in the final-product market.

Horizontal Mergers and Supplier Power

Supplier market power—such as the ability of branded goods suppliers to dictate terms to retailers—is an important feature of many markets. We show that supplier power can counteract the effects of downstream mergers on consumer prices where there are two-part contracts. This is because greater market power allows suppliers to set contracts that internalise partially the impact of the merger on downstream prices. Post-merger, the supplier reduces the per-unit price at which it supplies the merged downstream firms, with the aim of maintaining total industry profitability—and then recoups the profits via a larger fixed fee. We modify the standard upward pricing pressure (UPP) formula to account for the supplier’s response to a horizontal merger in the downstream market, while preserving much of the simplicity of the standard approach.

Welfare Consequence of Common Ownership in a Vertically Related Market*

We investigate how common ownership affects welfare in a vertically related market. Although common ownership mitigates the double marginalization problem and improves welfare, it restricts competition among downstream firms and harms welfare. We find that whether common ownership is welfare‐improving depends on the degree of competitiveness in the downstream market. Common ownership is more likely to improve welfare when there are fewer downstream firms and a greater degree of product differentiation. In other words, common ownership may improve welfare when competition in the downstream market is weak.

Vertical Contracts and Downstream Entry*

We study the implications of different contractual forms in a market with an incumbent upstream monopolist and free downstream entry. We show that traditional conclusions regarding the desirability of linear contracts radically change when entry in the downstream market is endogenous rather than exogenous. By triggering more entry than two‐part tariffs, wholesale price contracts can generate higher aggregate output, consumer surplus, and welfare. In light of this, the upstream monopolist may prefer to trade with wholesale price contracts as well as to give up part of its bargaining power when it is high.

Data-driven analysis of digital entrepreneurship in medical supply resilience confronting the COVID-19 epidemic

Soaring demand for medical supply caused by the frequent outbreaks of regional COVID-19 epidemic has gained increasing attention in recent years. This motivates the upstream manufacturers to develop their self-brand products to satisfy the exploded demand, which in turn leads to tense competition with their brand customers in the downstream market. In this paper, we use a multi-methodological approach to study whether the incumbent brand should adopt digital technology to forecast demand information and then flexibly adjust the order decisions. From both data statistics and analytical investigation, we find digital transformation can achieve a triple-win situation among the incumbent brand, the social welfare and the consumer surplus. Win-win situation also exists between the manufacturer and the incumbent brand. Our extensive Monte-Carlo data simulation indicates that: (1) a low product substitutability can promote the incumbent brand's digital transformation by at least 50.8% and at most 97.3% efficiency improvements; (2) a moderate product substitutability can improve the incumbent brand's digital transformation incentive by at least 43.7% and at most 98.8%; and (3) a high product substitutability benefits the manufacturer through digital transformation by at least 31.4% but at most 70.8%. Our research contributes by both theoretical optimization and data processing/policy simulation, which generates useful managerial insights for firms’ digital entrepreneurship decisions.

Single monopoly profits, vertical mergers, and downstream foreclosure

We review the Chicago school's single monopoly profit theory whereby an upstream monopolist cannot increase its profits through vertical integration as it anyway has sufficient market power. In our model the dominant supplier has full bargaining power, uses observable two-part tariffs, and is only constrained by a less efficient source (such as in-house production). We show that, by vertically integrating with a downstream incumbent, the supplier can profitably commit to pricing more aggressively if a downstream entrant refuses its supply contract. This can foreclose the downstream market. The anti-competitive effects arise from the seemingly pro-competitive elimination of double marginalization.

Improving resilience via capacity allocation and strategic pricing: Co-opetition in a shipping supply chain

The shipping industry has witnessed fiercer competition and more volatility. As a new source to increase profits, more and more liner companies are beginning to encroach on the downstream market, forming a co-opetition relationship between liner companies and freight forwarders. Insufficient (globally or regionally) capacity is also becoming a common problem to liner companies. This paper uses a game-theoretical model to study how can resilience be improved through capacity allocation and pricing in a shipping supply chain with insufficient capacity. We solve the model analytically and find that: The establishment of a direct selling platform (encroachment) helps the liner company to expand his competitive advantages, the price and profit of the liner company are higher than the counterparts of the freight forwarder. Moreover, with the spot market, deliberate capacity allocation and pricing strategy can help to enhance supply chain resilience in case of capacity shortage.

Remanufacturer’s downstream encroachment and incumbent brand’s order shifting in Pareto improvement of economic and environmental sustainability

In the recent years, supported by Industry 4.0 techniques and government’s strict quality supervision, remanufactured components can be of high quality “as good as new”. This encourages the supplier of remanufactured components to develop self-branded business and encroach on downstream market to compete with the incumbent brand. In this paper, we build a three-player game-theoretical model to investigate the pros and cons of the remanufactured component supplier’s (Supplier R’s) downstream encroachment, under the incumbent brand’s single sourcing and order shifting strategies, respectively. We formulate Supplier R’s nonlinear remanufacturing cost depending on the random quality of the collected components, based on which we find the incumbent brand’s weak brand advantage will induce Supplier R’s downstream encroachment. We also find that the incumbent brand’s order shifting helps save Supplier R’s remanufacturing cost and hence, limits Supplier R’s downstream encroachment. Regarding the environmental sustainability, we use two indexes to measure it and show that there exist opportunities of Pareto improvement of economic and environmental sustainability for the supply chain system.

The impact of revenue-sharing contracts on parallel shipping alliances

In this paper, we explore the effect of revenue-sharing contracts between ports and shipping lines to counter the negative effects of parallel shipping alliances. We consider a vertical structure approach formed by port-shipping line chains, where ports are considered the upstream market, while shipping lines are the downstream market. Then, we propose the vertical integration of both chains as a solution to the loss of welfare because of the shipping alliance. We find that when ports may influence the downstream markets, welfare increases, and it is a proper ports response that port horizontal cooperation.

When can auctions maximize post-auction welfare?

I study auctions in which firms bid for licenses that reduce their marginal costs in a post-auction downstream market. When there are three or more firms, I show that the Vickrey–Clarke–Groves (VCG) auction maximizes consumer surplus in dominant strategies if and only if it maximizes producer surplus in dominant strategies. With two firms, the effect on consumer surplus is ambiguous. When the VCG auction does not maximize consumer surplus, I show that consumer surplus can be maximized by adding caps, i.e., restricting the number of licenses a bidder can win. This might lower producer surplus.

Under the loupe: the case for carbon-offset LNG from Australia

More than 2 million tonnes of carbon-offset (LNG) were traded in 2021, and we expect this market to exceed 25 million tonnes of LNG by 2030. A critical aspect to enable this growth will be the veracity of offset claims (which have come under increasing scrutiny from investors, lenders, and consumers), and compliance with the principles of additionality, permanence, and non-deterrence. This paper will examine broader trends in the decarbonisation of the LNG sector to prepare for a low-carbon world: renewables-sourced electrification, carbon capture, utilisation and storage (CCUS), and the use of high-quality offsets. We discuss the development of a cross-value chain downstream market for carbon-offset LNG in Australia’s North Asian customer-countries, such as in Japan where at least 47 downstream customers have signed carbon-offset GSAs (general security agreements) with 7 importers, and the advantages of Australian LNG to support this nascent market. Proximity lowers emissions from transportation, while the upcoming large-scale implementation of CCUS will lower well-to-ship emissions. For instance, CCUS at Moomba can remove more than 35% of the well-to-ship emissions from Darwin LNG, while the Ichthys CCUS hub will remove more than 22% of that from Ichthys LNG. Further, the existing participation from North Asian buyers in Australian LNG ventures ensures better visibility of the emissions profile that they take home. In addition, we discuss the advantages of purchasing LNG from high-accountability and high-transparency regimes as investors tighten scrutiny on ESG (environmental, social, and corporate governance) reporting, and how blockchain technology is being deployed to ensure robustness in carbon accounting.

Development Trend and Investment Prospect of Intelligent Medication Management in China

With the implementation of the policy of “hierarchical diagnosis and treatment” in China and the gradual establishment of local medical associations, the service capacity of basic medical and health institutions has been improved, and some patients with common diseases will make more use of primary medical resources to relieve the overload of leading hospitals, thus giving rise to the extensive demand for the information management system of primary medical and health institutions, and promoting the expansion of the downstream market of the industry. Catalyzed by the epidemic, new domestic bases are expected to further drive the expansion of the intelligent medication management industry. Therefore, this paper analyzes the current development status of this industry including analysis on which specific area is now the most profitable and which one has the greatest potential in the future. The analysis also includes plights, new trends, and market demands in the industry. Most importantly, the main target is to discuss the prospect of development and potential in investment in this industry in China.

Peer‐to‐peer sharing platforms with quality differentiation: Manufacturer's strategic decision under sharing economy

As peer‐to‐peer sharing platforms emerge in the downstream market, upstream product manufacturers may build their exclusive sharing platform, seeking benefits from the sharing market. To study the profit and welfare implications of the emergence of sharing economy and manufacturer's platform‐building strategy, we employ a vertically differentiated duopoly setting and consider three scenarios: no‐sharing benchmark, a single third‐party platform emerged, and manufacturer‐built platform co‐existing with the third‐party platform. Formulating and solving the game in each scenario, we compare the equilibrium outcomes, including manufacturers' profits, consumer surplus and social welfare, before and after scenario transitions. For the manufacturers' profits, no matter which manufacturer builds the platform in presence of the third‐party platform, that manufacturer will be better off, whereas the opponent manufacturer may also benefit, depending on the quality differentiation perceived by consumers in the product selling market and in the sharing market. Moreover, when comparing against the no‐sharing benchmark, the manufacturers benefit from the sharing only when the quality differentiation is large enough and the production cost is not small. For the welfare implication, if the renters derive the same usage utility as the owners in the sharing market, the consumer surplus and the social welfare will always increase as the third‐party platform emerges or a manufacturer builds its platform. Otherwise, either platform could hurt the consumer surplus and the social welfare, especially when the quality differentiation is large. Our research highlights the innovative platform‐building strategy in the presence of peer‐to‐peer sharing economy and offers important insights to all market participants.

Can parallel airline alliances be welfare improving? The case of airline–airport vertical agreement

Parallel airline alliances have negative effects on consumers a priori; however, they can be counteracted if airports may modify the behavior of airlines. In particular, vertical airport–airline agreements allow the airport to influence the competition downstream market, changing the effects of parallel alliances. In this paper, we analyze the effects of parallel alliances in the context of competition between vertical airport–airline pairs competition. We show that under the influence of airports, parallel alliances are welfare improving, and the number of passengers increases, against former studies. These results offer a new brand of analyses to be considered by authorities that evaluate parallel alliances.