Upstream Competition Research Articles

Substitution Effects in Supply Chains with Asymmetric Information Distribution and Upstream Competition

Inventory management in markets with substituting customers is extremely challenging, not only for a downstream wholesaler, but also for upstream manufacturers. Motivated by the structures in the agrochemical market, we analyze the optimal production and stocking quantities of a manufacturer and a wholesaler, respectively, in a two-stage supply chain with upstream competition and vertical information asymmetries. We characterize a monopolistic wholesaler's optimal stocking quantities and show that these quantities are not necessarily monotonic, neither in the available production quantities nor in the customers' substitution rates. We further derive the optimal production quantities of a monopolistic and a competitive manufacturer when they are incompletely informed about the wholesaler's stocking quantities. We find that the introduction of competition may lead to decreasing production quantities for some products. Furthermore, a product's end-of-season inventories at the manufacturer which arise due to information asymmetries may decrease even when initial production levels increase. Key words: customer substitution; supply chain; asymmetric information; competition; inventory management

Vertical Practices Facilitating Exclusion

Resale price maintenance (RPM), slotting fees, loyalty rebates and other related vertical practices can allow an incumbent manufacturer to transfer profits to retailers. If these retailers were to accommodate entry, upstream competition could lead to lower industry profits and the breakdown of these profit transfers. Thus, in equilibrium, retailers can internalize the effect of accommodating entry on the incumbent’s profits. Consequently, if entry requires downstream accommodation, entry can be deterred. We discuss policy implications of this aspect of vertical contracting practices.

Upstream uncertainty and countervailing power

We study vertical contracting through bargaining between an upstream supplier and downstream retailers. We consider the effect of supplier uncertainty as to final volumes on the efficient bargains struck. Uncertainty causes retail price effects: large buyers wield countervailing power (deliver lower retail prices) if upstream marginal costs are decreasing. If there were no upstream uncertainty, downstream retail prices would be independent of buyer size. With enough uncertainty large buyers have buyer power also (secure advantageous input prices). Downstream mergers, or organic growth of a downstream firm, change the uncertainty facing the upstream supplier and so result in “waterbed effects” on other buyers. We show that uncertainty for suppliers can be generated by upstream competition.

Competition in Services and Efficiency of Manufacturing Firms: Does 'Liberalization' Matter?

In developed economies, services form an increasing proportion of inputs employed by manufacturing firms. While downstream firms act in a very competitive environment, services often operate in protected or highly regulated markets. In this paper, I empirically investigate whether the degree of competition in services affects the efficiency of manufacturing firms through services production inputs. By using both firm and sector level data for France, through input-output analysis I show that variations in the upstream competition, especially in network industries, affect the average productivity level in manufacturing industry: an increase in average markups is associated with a reduction in manufacturing productivity. The findings differ according to firms size and initial efficiency level: in the short run less efficient and small firms are relatively mostly harmed by an uncompetitive service sector.

The Impact of Contracts on Upstream Innovation Incentives in a Supply Chain

We consider a supply chain with an upstream supplier who invests in innovation and a downstream manufacturer. We study the impact of supply chain contracts with upstream innovation, focusing on three different contract scenarios: (i) a wholesale price contract set by the supplier, (ii) a quality-dependent wholesale price contract set by the manufacturer, and (iii) a revenue sharing contract. We confirm that a revenue sharing contract can coordinate a supply chain including investment in innovation, whereas wholesale price contracts may result in under investment in innovation. However, the downstream manufacturer does not always prefer a revenue sharing contract; the manufacturer’s profit can be higher under a quality-dependent wholesale price than that under a revenue sharing contract, specifically when the innovation cost of the upstream supplier is low. We then extend our model to incorporate upstream competition between suppliers. When the competing suppliers set the wholesale price, by inviting upstream competition, the manufacturer can increase his profit substantially to the level in which he has the right to set the quality-dependent wholesale price in a one-to-one supply chain. Furthermore, under the upstream competition, the revenue sharing contract coordinates the supply chain, and is also an optimal contract form for the manufacturer. We also analyze the case of complementary suppliers, and show that our primary results are robust.

System Operators in the England and Wales Water Industry: Lessons from US and EU Energy Industry Experience

This paper examines the experience of system operators in the electricity and gas industries in the US and the EU and draws lessons for the reform of the England and Wales water supply industry. The main conclusion is that ITSOs (independent transmission system operators) are the most effective type of system operator and provide the largest benefits to consumers. It is argued that regional ITSOs are also likely to be the most appropriate long-run form of system operator for the England and Wales water supply industry, not least because they would best encourage upstream competition and bulk water trading.

Online Product Reviews: Implications for Retailers and Competing Manufacturers

This paper studies the effect of online product reviews on different players in a channel structure. We consider a retailer selling two substitutable products produced by different manufacturers, and the products differ in both their qualities and the fits to consumers' needs. Online product reviews provide additional information for consumers to mitigate the uncertainty about the quality of a product and about its fit to consumers' needs. We show that the effect of reviews on the upstream competition between the manufacturers is critical in understanding which firms gain and which firms lose. The upstream competition is affected in fundamentally different ways by quality information and fit information, and each information type has different implications for the retailer and manufacturers. The quality information homogenizes consumers' perceived utility differences between the two products and increases the upstream competition, which benefits the retailer but hurts the manufacturers. The fit information heterogenizes consumers' estimated fits to the products and softens the upstream competition, which hurts the retailer but benefits the manufacturers. Furthermore, reviews may also alter the the nature of upstream competition from one in which consumers' own assessment on the quality dimension plays a dominant role in consumers' comparative evaluation of products to one in which fit dimension plays a dominant role. If manufacturers do not respond strategically to reviews and keep the same wholesale prices regardless of reviews (i.e., the upstream competition is assumed to be unaffected by reviews), then, we show that reviews never hurt the retailer and the manufacturer with favorable reviews, and never benefit the manufacturer with unfavorable reviews, a finding that demonstrates why reviews' effect on upstream competition is critical for firms in online marketplaces.

Profit-enhancing competitive pressure in vertically related industries

Under a simple Cournot model with vertical relations, when downstream firms engage in process R&D, the profits of input suppliers for which upstream competition exists may be larger than those in which each input supplier has a bilateral monopoly relation with its buyer (downstream firm). This is because upstream competition leads to higher levels of investment by the downstream firms. Furthermore, we incorporate the decisions of downstream firms to acquire the ability to procure input from potential outside suppliers, which has the effect of placing competitive pressure on existing input suppliers. We show that no downstream firm acquires such an ability to procure its input from potential outside suppliers in some cases although the acquisition could benefit the input suppliers.

Developing upstream competition in the England and Wales water supply industry: A new approach

This paper sets out the main reasons for introducing upstream competition in the water supply industry of England & Wales i.e. competition in the supply of raw and potable water to retailers and large users as well as some competition options. The paper discusses the possibilities for trade both in abstraction rights and in bulk water. The paper covers the issues that would need to be resolved for such competition to be effective, including rents, stranded assets and the concentration of water rights ownership. A lot of attention is given to transitional issues drawing on the lessons learned in UK natural gas industry liberalization and EU energy sector reforms over the last 15 years.

Upstream Competition between Vertically Integrated Firms

We propose a model of two‐tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous input, the Bertrand logic may collapse, and the input may be priced above marginal cost in equilibrium. These partial foreclosure equilibria are more likely to exist when downstream competition is fierce or when unintegrated downstream competitors are relatively inefficient. We discuss the impact of several regulatory tools on the competitiveness of the wholesale market.

Countervailing Power and Chain Stores

The countervailing power of large buyers subdues the market power of sellers, but price concessions won by large buyers in upstream markets may or may not translate into lower prices downstream. This paper presents a model in which upstream price concessions leads to lower downstream prices. In this model, the countervailing power of a large retail chain store enables the firm to play one large supplier off against another to win lower prices. An indirect effect of these interactions is that small retailers also pay lower prices, although not as low as the chain. To the extent that the chain’s countervailing power stems from its multi-market operations, and local retail markets remain competitive, the chain’s countervailing power translates into lower retail prices. In fact the retail-price-restraining effect of the chain is greater than the effect produced when upstream competition is enhanced by the entry of an additional seller.

Rationales For and Against FCC Involvement in Resolving Internet Service Provider Interconnection Disputes

Rationales For and Against FCC Involvement in Resolving Internet Service Provider Interconnection Disputes

Do Product Market Regulations in Upstream Sectors Curb Productivity Growth? Panel Data Evidence for OECD Countries

Based on an endogenous growth model, we show that intermediate goods markets imperfections can curb incentives to improve productivity downstream. We confirm such prediction by estimating a model of multifactor productivity growth in which the effects of upstream competition vary with distance to frontier on a panel of 15 OECD countries and 20 sectors over 1985-2007. Competitive pressures are proxied with sectoral product market regulation data. We find evidence that anticompetitive upstream regulations have curbed MFP growth over the past 15 years, more strongly so for observations that are close to the productivity frontier.

Anti-competitive effects of resale-below-cost laws

We show that resale-below-cost laws enable producers to impose industrywide price-floors to retailers. This mechanism suppresses downstream competition but also dampens upstream competition, leading to higher prices. Price-floor may be more profitable for producers than resale price maintenance contracts and, while resale price maintenance may have ambiguous effect on welfare, price-floors always harm welfare. Retailers' buyer power appears as a key element for a price-floor to work out.

RPM as an Exclusionary Practice

A key distinction in classifying RPM systems according to the present state of the literature is the distinction between single manufacturer-driven RPM and any other RPM system. While anticompetitive explanations suggest that RPM is introduced in furtherance of a cartel either at the retail level or at the manufacturing level, procompetitive explanations show how RPM may benefit a single manufacturer. Subsequent to the Supreme Court's ruling in Leegin v. PSKS, it would seem logical to create a presumption of procompetitiveness when RPM is introduced at the genuine initiative of a single manufacturer. This article challenges the consensus according to which single manufacturer-driven RPM is categorically procompetitive. I show that RPM can be used, and is likely to be used, as an exclusionary measure for the elimination of upstream competition. It thus has significant anticompetitive potential even when it is not introduced in furtherance of a cartel.

Introducing competition into England and Wales water industry – Lessons from UK and EU energy market liberalisation

This paper summarises the experience concerning electricity and natural gas in the UK and the European Union since the 1980s with a view to drawing lessons for potential liberalisation and the introduction of competition into the England and Wales water industry. The paper suggests that the main lesson from energy sector experience is the requirement is to develop upstream competition in the supply of bulk water both to retail supply companies and to large industrial consumers. The pattern of water supply and demand in England and Wales is that there are excess supplies in the North and West and supply shortages in the South and East. In consequence, provided that there is sufficient interconnection capacity within and between regions, there should be major potential gains from trade both in bulk water supplies as well as in trade of abstraction licences. Such trade can offer potentially sizeable environmental benefits in terms of water sustainability as well as in short and long-term efficiency benefits to consumers. The paper concludes with recommendations for some experiments with abstraction licence and bulk water trading, e.g. in the South East of England.

Modelling the incentive to participate in open source biopharmaceutical innovation

The open source model provides a valuable framework for collective knowledge production and dissemination. Open knowledge networks and other cooperative strategies (classified as open source discovery initiatives) are enabling biopharmaceutical companies to access disembodied knowledge-based resources critical to downstream drug development. The objective of these cooperative strategic alliances is to preserve the downstream technological opportunities for multiple firms. When upstream discovery research cannot yield commercial products and when the costs associated with excessive upstream competition are too high, companies jointly benefit from cooperative knowledge production and open knowledge dissemination. An analysis of 39 open source initiatives (consortia) provides us with information on: the likely participants in such initiatives, the focus of knowledge production activities, the characteristics of the knowledge generated, and the management of joint knowledge assets. Based on this analysis, we use game models to understand the decision to participate in such strategic alliances better. Our game models provide a simple but elegant framework for understanding the impact of changing knowledge structures on the payoffs associated with cooperation and defection in knowledge production, and therefore on behaviour.

Explaining experience curves for new energy technologies: A case study of liquefied natural gas

Many new energy technologies seem to experience a fall in unit price as they mature. In this paper we study the unit price of liquefying natural gas in order to make it transportable by ship to gas power installations all over the world. Our point of departure is the experience curve approach, however unlike many other studies of new energy technologies, we also seek to account for autonomous technological change, scale effects and the effects of upstream competition among technology suppliers. To our surprise we find that upstream competition is by far the most important factor contributing to the fall in unit price. With respect to the natural gas business, this may have implications for the future development in prices as the effect of increased upstream competition is temporary and likely to weaken a lot sooner than effects from learning and technological change. Another more general policy implication, is that while promoting new energy technologies, governments must not forget to pay attention to competition policy.

Interacting Supply Chain Distortions: The Pricing of Internal Transfers and External Procurement

This paper examines the impact of distortions wrought by transfer pricing when a firm is engaged in both internal production and external procurement of inputs. In particular, we demonstrate that a firm can actually glean benefits from often-discussed transfer-pricing problems in dealing with an external supplier. Though transfer prices above marginal cost introduce inter-division coordination problems, they also introduce a lower willingness to pay to outside suppliers. Knowing that costly internal transfers will eat into demand, the supplier is more willing to set lower prices. Such supplier discounts can make decentralization worthwhile for the firm. This benefit of decentralization is shown to be robust to variations in both downstream and upstream competition.

Upstream Competition and Vertical Integration in Electricity Markets

Many studies have found substantial market failures in electricity markets that have been restructured to allow wholesalers to set prices. Vertical integration of firms may partially mitigate market power since integrated firms have a reduced interest in setting high prices. These producers sell electricity and also are required to buy power, which they provide to their retail customers at set rates. This paper examines the importance of vertical integration in explaining firm behavior during the first summer following the restructuring of the Pennsylvania, New Jersey, and Maryland wholesale market. I compare the behavior of other firms with that of two producers that, owing to variation in state policy, had relatively few retail customers. I conclude that restructuring led to an increase in anticompetitive behavior by large net sellers but that overall vertical integration both mitigates market power and diminishes its distributional impacts.