Upstream Manufacturer Research Articles

Strategic Benefits of Referral Services

In many industries, Internet referral services, hosted either by independent third-party infomediaries or by manufacturers, serve as digitally enabled lead-generators in electronic markets, directing consumer traffic to downstream retailers in a distribution network. This reshapes the extended enterprise from the traditional network of upstream manufacturers and downstream retailers, to include midstream third-party and manufacturer-owned referral servics in the supply chain. We model competition between retailers in a supply chain with such digitally- enabled institutions, and consider their impact on the optimal contracts between the manufacturer, referral intermediary and the retailers. Offline, retailers face a higher customer discovery cost. In return, they can engage in price discrimination based on consumer valuations. Online, they save on the discovery costs, but lose the ability to identify consumer valuations. This critical tradeoff drives firms' equilibrium strategies. We derive the optimal contracts for different entities in the supply chain and highlight how these contracts change with the entry of independent and manufacturer-owned referral services. The establishment of a referral service is a strategic decision by the manufacturer. It leads to a diversion of supply chain profit from a third-party infomediary to the manufacturer. Further, it enables the manufacturer to respond to an infomediary, by giving itself a greater flexibility in setting the unit wholesale fee to the profit maximizing level. Both third-party and manufacturer-sponsored referral services play a critical role in enabling retailers to discriminate across consumers different valuations. Retailers use online referral services to screen out low valuation consumers, and sell only to high valuation consumers in the online channel. Our model thus endogenously derives a correlation between consumer valuation and online purchase behavior. Finally, we show that under some circumstances, it is too costly for the manufacturer to eliminate the referral infomediary.

Price flexibility in channels of distribution: Evidence from scanner data

In this study, we empirically examine the extent of price rigidity using a unique store-level time-series data set – consisting of (i) actual retail transaction prices, (ii) actual wholesale transaction prices which represent both the retailers’ costs and the prices received by manufacturers, and (iii) a measure of manufacturers’ costs – for 12 goods in two widely used consumer product categories. We simultaneously examine the extent of price rigidity for each of the 12 products at both, final goods and intermediate goods levels. We study two notions of price rigidity employed in the existing literature: (i) the frequency of price changes, and (ii) the response of prices to exogenous cost changes. We find that retail prices exhibit remarkable flexibility in terms of both notions of price rigidity, i.e., they change frequently and they seem to respond quickly and fully to cost changes. Furthermore, we find that retail prices respond not just to their direct costs, but also to the upstream manufacturers’ costs, which further reinforces the extent of the retail price flexibility. At the intermediate goods level of the market, in contrast, we find relatively more evidence of rigidity in the response of manufacturers prices to cost changes. This despite the fact that wholesale prices change frequently and therefore exhibit flexibility according to the first notion of price rigidity.

Local Content Requirements, Vertical Cooperation, and Foreign Direct Investment

Local content requirements (LCRs) have been observed empirically to 1) protect vertically integrated domestic industries and 2) induce inward foreign direct investment (FDI) in intermediate goods production. We examine the effects of an LCR in the context of potential FDI in upstream manufacturing by a foreign multinational and potential vertical cooperation between a host country's upstream and downstream producers. In case of vertical cooperation domestic producers have an incentive to set the price of the intermediate strategically to discourage FDI. Vertical cooperation is found to enhance the rent-shifting effect of the LCR, whereas the FDI response increases price competition and reduces domestic profits. In both cases, manufacturing efficiency and foreign welfare decrease, suggesting the need for multilateral agreement in the WTO to curb the continuing but disguised use of LCRs in industrialized countries.

Upstream mergers, downstream mergers, and secret vertical contracts

In an industry characterized by secret vertical contracts, we consider a benchmark case where two vertical chains exist, with two upstream manufacturers selling to two downstream retailers, and show that the equilibrium prices are independent of whether upstream or downstream firms have all the bargaining power. We then analyse two alternative mergers, and show that a downstream merger (which gives the downstream monopolist all the bargaining power) is more welfare detrimental than an upstream merger (which gives the bargaining power to the upstream monopolist). We also show that downstream and upstream mergers have the same effects when contracts are observable.

On Vertical Mergers and Their Competitive Effects

It is well known that vertical integration cats change the pricing incentive of an upstream producer. However, it has not been noticed that vertical integration may also change the pricing incentive of downstream producer and the incentive of a competitor in choosing input suppliers. I develop an equilibrium theory of vertical merger that incorporates these additional strategic considerations. Under fairly general conditions, a vertical merger will result in both efficiency gains and a collusive effect. The competitive effects of a vertical merger depend on the cost of switching suppliers and the degree of downstream product differentiation. Copyright 2001 by the RAND Corporation.

Option Contracts as a Solution to the Holdup Problem in Agri-food Markets

It is well known that incomplete contracts, together with asset specific investment, can result in investment holdup because of opportunistic behavior by either the commodity producer or the processor. In recent years, several papers have shown how contracts which explicitly account for ex post renegotiation can reduce or eliminate the holdup problem. In one particularly promising type of analysis, a simple option contract is awarded to the upstream producer. In this paper, it is shown that if the source of risk is with respect to the value of the processed commodity, then a producer option contract does not work but a processor option contract does work to eliminate the holdup problem. A simple example is used to illustrate the main findings.

Retail Characteristics and Ownership Structure

The choice of vertical relationships between an upstream manufacturer and a set of heterogeneous downstream retailers/entrepreneurs is examined using a principal-agent framework. Standard principal-agent theory predicts that as unobservable effort exerted by the retailer/entrepreneur becomes more important to the manufacturer, contracts between the manufacturer and agent will entail strong incentives and less direct control. The observability of effort is linked to retail characteristics in the gasoline industry, and station-level data on retail characteristics and ownership structure from every gasoline station in the Los Angeles retail gasoline market from 1992–1996 confirm the model's predictions.

Can the telecom equipment industry afford accelerating technical advance?

Abstract While established producers throughout the telecom industry—and especially upstream equipment manufacturers—have been steadily shifting their investment mixes to support product innovation, new cash returns on those investment shifts often have been steadily declining. Are these trends linked causally, and if so, what are the implications for the industry and beyond? Our centerpiece analyses draw on the conceptual apparata of nonlinear dynamics to illustrate the evolving complexity of the relationship between escalating cost and technical advance throughout the industry since the mid-1970s. We conclude by considering the broader implications of these trends for the industry at large.

The adoption of life-cycle approaches by industry: patterns and impacts

Firms are the primary organisers and drivers of resources flows through and emissions from developed economies. Sustainable industrial development is a process in which these flows are modified. This includes both a reduction of materials and energy intensity, increasing cyclicity of materials fluxes, and a reduction of dissipative uses of toxic materials. The role of firms in achieving these changes is discussed in this paper. Life cycle assessment activities in large European firms in six industrial sectors are assessed. Market and regulatory pressures on firms to adopt life cycle approaches differ markedly between industrial sectors and across national markets. Producers of final products are most likely to find opportunities for improvements in the life cycle environmental performance of products while making gains in dynamic competitiveness at the same time. Upstream producers of commodity products have tended to use life cycle approaches defensively against negative environmental claims and in seeking to influence the policy process. Despite widespread adoption of life cycle approaches, changes in product system ecoprofiles are likely to be slow given technological trajectories, infrastructural and resource endowments, and the fragmentation of environmental responsibility across the product chain.

Local content requirements and vertical market structure

The effects of local content requirements (LCRs) are analysed under successive oligopoly, in the context of European Community LCRs imposed on Japanese firms. LCRs are only binding for foreign downstream firms which import intermediate goods from related suppliers. Although LCRs in this setting ‘raise rival's costs’, they enhance upstream producers' market power and raise the intermediate goods price, which negatively affects profits and market share of domestic downstream firms. LCRs have substantial anti-competitive output reducing effects, are generally ineffective in increasing domestic welfare, and may have undesirable income distribution effects. Under cooperative bargaining between domestic downstream and upstream producers, anti-competitive effects are reduced and the effectiveness of rent shifting is improved.

On Vertical Restraints and the Law: A Reply

* In our 1984 article we characterize the vertical restraint contracts that harmonize the interests of downstream, monopolistically competitive retailers with those of an upstream producer. The potential list of restrictions includes resale price maintenance, quantity forcing, territorial protection, and fixed franchise fees. In his comment on this article Waterson (1988) takes issue with the substitutability of territorial restraints and resale price maintenance. Here, we discuss this substitutability and associated empirical and legal issues.

THE INCENTIVES FOR RESALE PRICE MAINTENANCE UNDER IMPERFECT INFORMATION

This paper considers both the incentives for and the welfare effects of resale price maintenance (RPM) in retail markets characterized by imperfect consumer information. In markets where point‐of‐sale information on the product is essential for sales and information on prices is costly, RPM permits manufacturers with some monopoly power to resolve two incentive conflicts with retailers. First, because retailers with price‐setting powers do not appropriate the gains in profit to an upstream manufacturer from actions taken to increase demand, their incentives to inform consumers of the product and to set low prices are inadequate. This purely vertical externality results in the classic “double mark‐up” of final prices. Second, when consumers' costs of price search vary, stores offering low prices and no information can exist in the market equilibrium. These discount houses free‐ride on the informational services of high‐price informing retail outlets — a horizontal externality. In the imperfect information setting of this paper, (1) administered pricing improves monopolists' profits by resolving the incentive conflict; (2) the profitable use of a price floor reduces the maximum retail price charged and may reduce the average retail price; (3) price floors or administered prices can be Pareto‐improving and more likely welfare (surplus)‐improving; (4) price floors are welfare‐improving.

Waters and Watercourses: Right of Appropriator to Foreign Waters Supplied by Upstream Producer

Waters and Watercourses: Right of Appropriator to Foreign Waters Supplied by Upstream Producer