Vertical Production Chain Research Articles

Development of Digital Platform Economy and Problems of Regulation in European Union

The ongoing growth of e-commerce has been changing the incentives and character of interaction between market participants at different levels of the vertical production chain. During the last 10 years, these trends have been attracting the attention of European antitrust and became a productive area of economic research. The altering nature of competition and the role of market participants influenced by the development of digital platforms have become the reference point for the emerging of new varieties of vertical restraints such as cross-platform parity agreements (across-platforms parity agreements). These types of agreements creates new incentives for firms. This was a challenge for the European Commission in the light of the preparation of the next edition of regulatory documents determining the legality of the application of vertical restrictive agreements, such as Vertical Block Exemption Regulation - "VBER" and Vertical Guidelines – "Guidelines for the Regulation of vertical restrictive agreements". We find it extremely interesting to identify to what extent the final versions of these regulatory documents took into account the opinions of judges, market participants and the academic community, who actively participated in identifying the most complex aspects of vertical interaction between firms and the growing role of digital platforms in this interaction.

Compounded Markups in Complex Market Structures

Using a publicly available input-output database that covers 44 countries and 56 industries, I show that most prices are, on average, two to three times higher than the natural costs of production, costs that include a normal rate of return to capital. The novelty in this research is the argument that the true markups are compounded—they incorporate the markups already existing in the intermediate goods and services (inputs) that a company purchases in a vertical chain of production. A complex market structure, one in which companies sell and purchase intermediate products from each other in both horizontal and vertical directions, is the perfect environment for inflating a price well above its natural level. This research may help understanding the true extent of market power. Market power has a substantial impact in such matters as income inequality, standard of living, and economic development. Keywords: complex market structure, compounded markup, monopoly pricing, world input-output tables

Dynamic characteristics of China's inflation: a two-country DSGE model based on a multi-level vertical industrial structure

We establish a two-country DSGE model with a vertical production chain to study the inflation dynamics in China. By introducing multiple layers of price stickiness and shadow economy production to the vertical industrial chain, our model helps to explain dynamic characteristics of inflation. In our model, shocks can not only affect inflations by passing down the production chain through cost channels, but also in the reverse way due to the intermediate demand effect and the investment costs effects. After calibrating and estimating the parameters, the simulation results show that more than 90% of inflation fluctuations in China can be attributed to domestic shocks, among which the domestic monetary shock and final sector technology shock are the most influencing factors in explaining China’s inflation dynamics.

Price Markups and Upstreamness in World Input-Output Data

Abstract This research uses the publicly available World Input-Output Database (WIOD) to investigate the relationship between an industry’s markup and its upstreamness, the industry’s position in the vertical chain of production; the research also identifies common attributes among high-markup industrial sectors: higher-markup industries display a higher level of capital compensation and a lower share of labour and other inputs in the value of output. Finally, it is found that upstream industries, those producing mostly raw materials and intermediate products enjoy higher market power than their downstream counterparts. This result could be among the first in the literature to find evidence of double marginalization at an industry level of aggregation. It also suggests that virtually all final product prices may incorporate substantial markups through their inputs.

A New Measure of Inter-Industry Distance and Its Application to the U.S. Regional Growth

We propose a new measure of inter-industry ‘distance’. This is constructed a la Antras et al. (2012). While they measure the distance of an industry from its final use - what they call ‘downstreamness’ of an industry - we measure the distance between a pair of industries. Our proposed index is a measure of input-output linkages between industries that incorporates a ‘distance’ flavor. Our measure distinguishes the number of vertical production stages that an industry’s product goes through until it is finally used by another industry by assigning larger weights to the value of input use with longer production chains.Hence our measure contains more information on the relation between two industries along the vertical production chain. We use this index to construct an aggregate measure of ‘industry connectedness’ of regions in the U.S. It measures the degree of industrial linkages of a region. We then empirically establish that each region’s labor productivity is positively associated with the ‘industry connectedness’. The result contributes to the large literature of agglomeration economies that the industrial linkage is one of the main sources of agglomeration economies and productivity growth, as emphasized by Marshall (1920). It also suggests that our index can serve as an alternative measure of the industrial linkages.

Changing Markets in Operating Systems; a Socio-Economic Analysis

This paper explores into the character of the market for operating systems in order to reach a better understanding of the characteristics, consequences of fragmentation, and impact in the overall development of the internet and the digital economy. For this purpose we consider the effects on trade and innovation, and on the significance for the architectures of networks in the digital economy. The article includes a review of the various forms of market definition of software operating systems to understand their economic characteristics from a socio-technological view. From the early dominance of IBM’s OS/360 to UNIX-related systems and the disk operating systems [DOS] of IBM and Microsoft through to Apple’s Mac OS and Google systems [Chrome OS and Android], there has been a succession of dominant players. We address the economic theory behind markets in platforms and its relationship with operating systems. Arguments are presented to describe three major sectors where the operating systems market requires further analysis: a) boundaries between the standard roles of consumption and production are blurred in the consideration of operating systems b) novel concepts of ownership c) the decoupling between services and physical supports raises issue of control rather than ownership. In the digital mobile environment, consumers do produce valuable services, or add value to the standard services sold to them. These generate information and data. These data become necessary for the actors operating in other layers of the production chain to add value to their services and products, and to generate brand-new services and applications. Thus, a novel situation occurs: the overall welfare of the system cannot be subdivided into consumer surplus and producer surplus; producers might appropriate some part of the overall welfare by becoming “consumers” themselves of the information and data generated by the (previously-labelled) consumers. We suggest that policy guidelines based on the standard industrial organization analysis are no longer quite so valid and legitimate. The concept of surplus changes meaning when the “consumption” side of the ecosystem can add value and generate new surplus to the “production side”. In the digital mobile industry, most of the inputs used by consumers are not really owned by them. Most of the inputs (intended in terms of both services and goods) utilized by the end user cannot be employed by the latter at will, according to their own “utility function”. The concept of ownership in law and economics is defined by the condition that the “owner” has the right to exclude others from the use of their property and can control the way in which others can restrain their use. The problem of control retraces standard issues covered by “vertical analysis” in competition policy (in terms of foreclosure, discrimination, and fair usage). The literature dealing with the problem of vertical restraints addressess: how ownership in one layer of the chain affects the control of elements or modules in other layers of the vertical production chain, and therefore their usage. The way in which vertical restraints shifts the rights of actors along the chain is a problem much less developed in the literature and we are not aware of any work explicitly modelling and developing this issue.

Marks & Spencer and the Decline of the British Textile Industry, 1950–2000

From the end of World War II, British clothing retailers—most notably, Marks & Spencer (M&S)—increasingly dominated the domestic textile industry, to some extent arresting its decline. This article uses financial and archival evidence to examine the distribution of costs and benefits in the M&S vertical network. It shows that these benefits became less tangible for textile firms from around 1985, in the context of lower-cost overseas competition. We chart the visible and invisible evolution of network management, demonstrating that retailer-producer collaboration evolved from a bilateral vertical partnership model to a hybrid version that retained partnerships with leading suppliers and an emphasis on domestic sourcing, but also facilitated offshore production. Since 1945, staple domestic industries in Western economies have been replaced with global production networks. In the United Kingdom, the cotton textile industry, and then the textile industry in general, declined in the face of increasing overseas competition. Survival strategies were based on restructuring and concentration. During a period of rapid transformation after 1960, cotton was absorbed into vertically structured textile conglomerates. Still, the decline continued, and as protection was phased out, fabric and apparel manufacturing faced similar threats, although rates of decline and strategic response depended on relative position in the vertical production chain. An alternative survival strategy based on vertical partnerships was led by retailers, particularly the dominant clothing retailer Marks & Spencer (M&S).

Factors of Functioning and Development of Tourist Clusters at Regional Level

1. Introduction Nowadays, tourism is viewed as a source of financial revenues of budgets of all levels; satisfying the needs of incoming tourists, tourist industry is a source of additional tax revenues, as means of increase of employment and quality of life of population, means of improving the health of population, basis for development of socio-cultural environment and propaganda of patriotic feelings of the youth, and a powerful tool of enlightenment and formation of moral platform of development of civil society. Despite the fact that over the recent years there was a substantial progress in systematization of existing statistical data on some or other aspects of tourism, the current statistical observation in Russia cannot fully cover all the range of tourism's influence on the economy of the country and its regions. Under the modern conditions of development of tourism sector in Russia, the cluster approach is used more actively--it is capable of influencing positively the effective functioning of tourist industry. The Federal targeted program of internal and incoming tourism in the Russian Federation (2011-2018) supposes state support for 12 tourist clusters and projects for more regional tourist clusters without federal support. As a rule, this approach is based on formation and use of unique tourist product. Dynamic development of tourism requires something more than unique tourist resources, convenient geographical location, and developed infrastructure. A huge role belongs also to economic and political environment, attitude of the state and local population to foreign tourists, foreign investment, and foreign way of life on the whole. That's why it is necessary to determine factors that hinder and factors that stipulate the development of cluster. Tourist cluster plays a very important role in development of not only municipal entities, subjects of the RF, and federal districts, but the country on the whole, solving the problems of social nature, including the ones related to creation of additional jobs, problems of increase of quality of internal tourist products and services and increase of investment and tourist attractiveness of regions and the country. 2. Modern Approaches to Determination of Tourist Clusters Development of theories and concepts of enterprises' placement on certain territory became a precondition for the formation of cluster concept. Its founder, M. Porter, defined cluster as groups of interconnected companies, specialized suppliers, suppliers of services, and companies in corresponding spheres, which are concentrated geographically, and organizations in certain spheres, which are connected to their activities and which compete but at the same time conduct joint activities (Porter M. 2003). This treatment determines key attributes of a cluster: geographical localization, commonness of activities, and market orientation. Thus, classic treatment of cluster determines its understanding as a group of geographically close interconnected companies and connected organizations of certain sphere, which are characterized by commonness of activities and supplement each other (Porter M. 1993). Thus, P.S. Rudneva views cluster as a group of localized interconnected companies, suppliers of equipment, components specialized services, infrastructure, RD vertical production chains, narrowly determined sectors, in which neighboring stages of production process create cluster core; industry sectors or groups of sectors, determined at a high level of aggregation (Thikhan T. …

Vertical Trade, Exchange Rate Pass-Through, and the Exchange Rate Regime

We compare the welfare of different combinations of monetary and currency policies in an open-economy macroeconomic model that incorporates two important features of many small open economies: a high level of vertical international trade and a high degree of exchange rate pass-through. In this environment, a small economy prefers a fixed exchange rate regime over a flexible regime, while the larger economy prefers a flexible exchange rate regime. There are two main causes underlying our results. First, in the presence of sticky prices, relative prices adjust through changes in the exchange rate. Multiple stages of production and trade make it more difficult for one exchange rate to balance the whole economy by adjusting several relative prices simultaneously throughout the vertical chain of production and trade. More specifically, there is a tradeoff between delivering an efficient relative price between home and foreign final goods and delivering an efficient relative price between home and foreign intermediate goods. Second, because the small economy faces a high degree of exchange rate pass-through under a flexible regime, it suffers from a lack of efficient relative prices in vertical trade. The larger economy, however, does not face this problem because its level of exchange rate pass-through is low.

THE FATE OF HORTICULTURE IN THE EAST CENTRAL EUROPEAN (ECE) TRANSITION COUNTRIES: A CASE STUDY OF HUNGARY

Prior to the time of the 1990s transition in Hungary from a socialist to a capitalist economy, the ECE (East-Central-European) countries produced a great proportion of the fruit, vegetables and wine grapes on large-scale farms. These products were delivered to the wholesale trade, to the processing industry or designated for export. Household farms produced for their own consumption or for local markets. Hungarian large farms also organized the production of small farms, and purchased and traded their products. Earlier, Hungary had been a major exporter of horticultural products. The country’s ecological conditions are good for both open-air and under-cover production. Hungary also has plenty of thermal-energy. Nowadays, horticultural exports from Hungary are still significant but their quantity is diminishing. After the transition, the vertical chain of production was broken. The wholesale trade did not buy up horticultural products from the numerous small farms. Many processing plants were destroyed. The Soviet market, which had been the major importer of horticultural products from the ECE countries, collapsed. As a consequence horticultural production decreased. The recent trend has been for farms to turn to more extensive cereal production encouraged by the EU’s agricultural support system. The domestic horticultural trade has also been damaged by the free import regime. The retail trade for food has become increasingly dominated by big retail trade chains. These require a steady flow of goods in large quantities and of a standard quality. The processing industries, which have been reorganized and are mainly in foreign hands, have the same demands. However, these stipulations cannot be met by individual farms. Farms have to cooperate in order to comply with these requirements. Such cooperation also receives subsidies from the EU. However, the current organization of cooperatives is proceeding slowly, at least in Hungary, where it needs more support and promotion from the national government. INTRODUCTION Hungary’s ecological conditions are favorable for both open-air and under-cover horticultural production. The country does not rank among the largest horticultural producers of Europe (especially when compared to Mediterranean producers), but its production is significant in the temperate zone. Hungarian vegetable production is about 2% of the EU-27 production and its fruit area is about 3.5% of the total EU-27 area. The two largest areas of apple trees are found in two new member states: in Poland (34%) and Romania (12,4%). Hungary has the fourth largest area under apricots, with a share of over 7 % of the EU-27 area. 10% of the EU-27 wine area is located in Romania, Bulgaria and Hungary with shares of 5, 3, and 2%, respectively (Data of Agricultural Statistics: Main results – 2007-08. 2009 edition of Eurostat). The research project examined the Hungarian supply chain for horticultural products. This paper deals with the state of production, labor use, markets, domestic and foreign trade, processing and cooperation in the field of horticulture.

Global Economic Crisis and Developing Countries

After a remarkable increase in the previous decade, world trade has been experiencing a dramatic fall in recent months. Vertical production chains have become a ‘propagation mechanism’ for these dramatic shifts. This article is based on recent research on vertical production chains and its determinants (Pitigala 2008) and highlights the implications of the global financial crisis on vertical production chains, with reference to the South Asia region. The results suggest that traditional policy barriers such as tariffs appear to have become less important for vertical trade; instead political risk, infrastructure and finance are more strongly associated with the growth of vertical specialization. The extent of vertical production chains and the weakening of the financial markets that support them explain the rapid contraction during the ongoing crisis. The effects may be long lasting as producers are forced to reconstruct not just weak, but broken links in their supply chains.

Pitfalls in Vertical Arrangements

A popular way of obtaining essential inputs requires the establishment of an input production joint venture (IPJV) in the upstream (U) section of the vertical chain of production by firms competing and selling final goods in the downstream (D) section of the vertical chain. In spite of the apparently simple arrangement there are many possible governances for the management of the IPJV according to the ownership structure and to the degree of delegation granted to the IPJV by parent firms. We explore the best sustainable governance arrangement for the IPJV. We address this question in a duopoly framwork and we find a large area of impossible vertical arrangements associated with technological asymmtery. The most likely governance of the vertical arrangment associated to the IPJV is total independence.

Inter-Firm Relations and Regional Development: Experiences from the Central Visayas, Philippines

In spite of economic globalisation and new technologies that 'shrink' the world, locality and proximity remain important for businesses. Many firms may increasingly be inserted into global chains of production, but the local environment in many ways remains the key playing field for entrepreneurs. Embedded in a relational economy, 'the local' presents powerful institutional opportunities and constraints for firms. In the central Visayas Islands of the Philippines, insertion into the global economy has been a patchy process, creating remarkably different production networks in the three neighbouring provinces of Bohol, Cebu and Negros Oriental. Despite their geographical proximity and shared national institutional framework, these provinces have clearly distinct economic structures and development paths. They thus allow a comparative analysis of the role of regional institutions. How is this diversity reflected in terms of regional differences in inter-firm networks, both in vertical production chains and in regionally embedded horizontal networks? And how do differences in networking affect economic activity and development in the provinces? Using key elements of Whitley's comparative business systems approach at the sub-national level, this paper seeks answers to these questions.

IS VERTICAL DISINTEGRATION PREFERABLE TO INTEGRATION WHEN THERE IS PROCESS R&D?

Vertical integration (VI) may show social superiority over vertical disintegration (VD) if there is an opportunity of internalizing most of the externalities affecting vertical arm's length relationships. When enterprises carry out process innovating R&D (PIRD), VI turns out to be quite often privately and socially superior to VD. However, there are circumstances where VI does not provide the same incentive to carry out PIRD. VD pushes further PIRD displaying instances of private superiority and even some spells of social desirability. If PIRD costs are asymmetric along the vertical chain of production, fresh advantages of VD may appear. In this sense, the paper may supply an additional interpretation of the recent wave of domestic and cross-border VD.

Estimating the New Keynesian Phillips Curve: A Vertical Production Chain Approach

It has become customary to estimate the New Keynesian Phillips Curve (NKPC) with generalized method of moments using a large instrument set that includes lags of variables that are ad hoc to the firm's price‐decision problem. Researchers have also conventionally used real unit labor cost (RULC) as the proxy for real marginal cost even though it is difficult to support its significance. This paper introduces a new proxy for the real marginal cost term as well as a new instrument set, both of which are based on the micro foundations of the vertical chain of production. I find that the new proxy, based on input prices as opposed to wages, provides a more robust and significant fit to the model. Instruments that are based on the vertical chain of production appear to be both more valid and relevant toward the model.

An Account of Global Intra-Industry Trade, 1962-2006

This paper provides a comprehensive description of intra-industry trade patterns and trends, using data on more than 39 million bilateral trade flows. In 2006, 27 percent of global trade was intra-industry if measured at the finest (5-digit) level of statistical aggregation, and 44 percent if measured at a coarser (3-digit) level of statistical aggregation. The observed steady growth in global intra-industry trade since the early 1960s suggests a process of world-wide structural convergence: economies are becoming more similar over time in terms of their sectoral compositions. In particular since the 1990s, this trend appears to be driven to a significant extent by the international fragmentation of vertical production chains. Intra-industry trade is a high-income and middle-income country phenomenon: African trade remains overwhelmingly of the inter-industry type. Moreover, the observed increase in intra-industry trade was not accompanied by a comparable increase in marginal intra-industry trade, suggesting that trade-induced adjustment pressures remain potentially important.

Trade theorems in a model of vertical production chain

This paper investigates the Rybczynski theorem, the Stolper–Samuelson theorem, and the Heckscher–Ohlin theorem in a two-factor vertical production chain model of trade. For this purpose, capital is introduced into the model of Yano and Dei [Yano, M., & Dei, F. (2003). Trade, vertical production chain, and competition policy. Review of International Economics, 11(2), 237–252.]. A primary analytic device is the economy-wide production curve. This curve is derived under autarky and free trade, respectively.

Optimizing and retaining product quality in the supply chain: for whom and who profits?

Present day retail groups are demanding extremely high quality and safety measures from their suppliers. The large retail chain called Tesco’s in the UK recently demanded a logistic performance from its suppliers of 99.8% as a minimum! The main retail chain of the Netherlands has demanded that it’s fruit and vegetable supplier will source globally for all it’s products resulting in great difficulties when it comes down to maintaining the residue levels of agrochemicals within acceptable limits. It is evident that a production and supply chain consisting of different companies operating on the spot market cannot meet these requirements. A recent change in the policy of the German government, making the tests for residue levels of agro-chemicals in fruits and vegetables public, resulted in a switch in policy of discount retail groups like Aldi and Lidl to stop buying their fruits and vegetables on the spot market and start sourcing from preferred suppliers through contracts. This allows for the build up of steady supply chains that can cope with the high demands on safety, logistics and quality. These chains need to innovate to cut costs and to speed up their processes in order to maintain their competitive edge. However through the close intermingling of the vertical chain partners it is not evident any more that when one invests in an innovation the profit of that investment can also be reaped by the investing party. Very often an investment in one part of the chain results in a profit in another part of the chain. A good example is the drive towards a longer shelf life of fresh products. Through investments in breeding this has led to an increase of shelf life of many fresh products. However the breeders got their profit through a competitive advantage, the growers got no profit, but the traders reaped the main profit through enhancement of their ability to speculate on the spot market. This can work as an inhibitory effect on the drive to innovate. It is therefore adamant that innovations in such complex interdependent vertical production and supply chains are set up in a strategic context. Chain partners should develop innovation strategies together and discuss the possible profits and costs in advance in order to negotiate the division of costs and benefits to create a win-win situation for all participants. This necessitates a means to predict possible profit and cost distributions among the participants across the entire supply chain. Therefore it is necessary to predict dynamic consumer responses in relation to product performance in the market. Here we need to interface consumer science with product physiology, both on a product level as well as on a batch level.

Estimating the New Keynesian Phillips Curve: A Vertical Production Chain Approach

It has become customary to estimate the New Keynesian Phillips Curve (NKPC) with GMM using a large instrument set that includes lags of variables that are ad hoc to the model. Researchers have also conventionally used real unit labor cost (RULC) as the proxy for real marginal cost, even though it is difficult to support its significance. This paper introduces a new proxy for the real marginal cost term as well as a new instrument set, both of which are based on the micro foundations of the vertical chain of production. I find that the new proxy, based on input prices as opposed to wages, provides a more robust and significant fit to the model. Instruments that are based on the vertical chain of production appear to be both more valid and relevant towards the model. This paper was revised in July 2006.

Japan's Network Economy: Structure, Persistence, and Change (review)

Reviewed by: Japan's Network Economy: Structure, Persistence, and Change Edward J. Lincoln (bio) Japan's Network Economy: Structure, Persistence, and Change. By James R. Lincoln and Michael L. Gerlach. Cambridge University Press, Cambridge, 2004. xx, 409 pages. $80.00. For much of the last 50 years, social scientists have grappled with the question of why the Japanese economy performed so well from roughly 1950 through the 1980s. Economists, political scientists, and sociologists all brought different analytical tools to this question. Economists, for example, [End Page 239] have tended to view the corporation as simply a black box, an institution that converts inputs into outputs in a measurable way, while sociologists have been much more interested in the institutional and human details of both the inner workings of the corporation and the interaction among corporations. Michael Gerlach and James Lincoln are two sociologists at the University of California, Berkeley, who have labored long in this vineyard. This new study looks at a very specific aspect of corporate behavior: the existence and meaning of networks of long-term business relationships among firms, known as keiretsu. This volume is both an analytical expansion and an update of a previous book by Gerlach—Alliance Capital (University of California Press, 1992). While the authors spend some time dealing with vertical keiretsu (the vertical production chains linking finished product producers and their parts suppliers), the bulk of the analysis deals with the horizontal keiretsu. Their focus is mainly on the six broad, informal business groups that have been so visible in the economic landscape in the last half-century—Mitsui, Mitsubishi, Sumitomo, Sanwa, Fuyo, and DKB. While most of these groupings have prewar zaibatsu antecedents, they are not conglomerates in the usual sense of the word, since no lead firm has controlling ownership stakes in the other members of the group, but these groups have been characterized by a distinctive pattern of minority-stake cross-shareholding. Members of a group also use the group bank as their main bank (that is, the bank from which the firm has its largest single loan), and core members belong to presidents clubs that meet once or twice a month. After an introductory chapter and an initial historical chapter that provides a fairly standard review with little new information, the guts of the book come in three lengthy statistical chapters. These rely on a data set covering the 259 largest corporations, including some financial institutions and trading companies as well as manufacturing firms and others, over the period from 1968 to 1997. Chapter three establishes support for the hypothesis that keiretsu ties (both horizontal and vertical) exist but weakened in some respects over the period covered. Chapter four establishes how equity connections and dispatch of directors is connected to trading ties among firms—establishing that there is a real business impact of keiretsu ties. Chapter five asks what the implications of these ties are for corporate performance, lending support to the hypothesis that member firms gain stability at the expense of profitability. That is, firms that belong to keiretsu are less profitable on average than independent firms, but they have less variability in their profits over time, as weak firms are pulled up and leading firms constrained. None of the conclusions reached by this analysis is particularly startling, but they should be reassuring to readers who have believed that keiretsu have had real implications for corporate behavior. [End Page 240] The data set for these chapters is explored in many ways—including analyses over time, by industry, and by individual horizontal keiretsu. Indeed, the statistical analysis is so thorough and technical that those readers without a background in quantitative analysis will find these chapters heavy going. The one major limitation of their data set, which the authors acknowledge, is that many of their variables are binary (1 or 0). For example, company A owns stock in company B, or it does not. This means that a great deal of potential richness in the analysis is lost by not measuring the strength of various linkages. Even without that richness, though, the data seem to provide adequate support for the various hypotheses put forth by the authors. Despite the thoroughness of...