Value chain structure and flexible production technologies

Nepelski, Daniel (2009): Value chain structure and flexible production technologies.

Abstract

Industries are transformed by the adoption of flexible production technologies and complementary changes in firms' organization. Some of the results of this transformation include companies extending their product lines and reshaping their relationships with outside partners. In this paper I analyze how the structure of the upstream industry influences upstream manufacturers' decisions regarding the choice of production technologies that enable them to extend product variety. The results of a theoretical model with two pairs of supply chains in which producers procure inputs from either two or a single supplier reveal that the benefits of new technologies to manufacturers might be eroded. In particular, an increased intrabrand competition and the introduction of inter-brand competition have adverse effect on producers' payoffs. Eventually, the choice made by downstream manufacturers departs from the socially optimal outcome.

• Item Type: MPRA Paper
• Language: English
• Keywords: flexible production technologies, merger, supply chain, vertical relations
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly ; Monopolization Strategies

References

Baake, P., Kamecke, U. and Normann, H.-T. (2004). "Vertical Foreclosure versus Downstream Competition with Capital Precommitment." International Journal of Industrial Organization, Vol. 22, 185-92.

Bakos, J. Y. and Treacy, M. E. (1986). "Information Technology and Corporate Strategy: A Research Perspective." MIS Quarterly, Vol. 10, 107-119.

Basker, E. (2006). "The Causes and Consequences of Wal-Mart.s Growth." Journal of Economic Perspectives, Vol. 21, 177-198.

Bernile, G., Lyandres, E. and Zhdanov, A. (2007). "A Theory of Strategic Mergers." Mimeo.

Bonanno, G. and Vickers, J. (1988). "Vertical Separation." Journal of Industrial Economics, Vol. 36, 257-65.

Brynjolfsson, E., Hitt, L. M. and Yang, S. (2002). "Intangible Assets: Computers and Organizational Capital." Brookings Papers on Economic Activity, Vol. 1, 137-81.

Dewan, S., Michael, S., C. and Min, C.-K. (1998). "Firm Characteristics and Investments in Information Technology: Scale And Scope E¤ects." Information Systems Research, Vol. 9, 219-232.

Dicken, P. (2003). "Global Production Networks in Europe and East Asia: The automobile components industries." The University of Manchester Working Paper, Vol. 7.

Eaton, C. and Schmitt, N. (1994). "Flexible Manufacturing and Market Structure." American Economic Review, Vol. 84, 875-888.

Fumagalli, C. and Motta, M. (2006). "Exclusive Dealing and Entry, when Buyers Compete." American Economic Review, Vol. 96, 785-795.

Gupta, S. (1998). "A Note on .Strategic Choice of Flexible Production Technologies and Welfare Implications.." Journal of Industrial Economics, Vol. 46, 403.

Hart, O., Tirole, J., Carlton, D. W. and Williamson, O. E. (1990). "Vertical Integration and Market Foreclosure." Vol. 1990, 205-286.

Hempell, T. and Zwick, T. (2005). "Technology Use, Organisational Flexibility and Innovation: Evidence for Germany." ZEW Discussion Paper, Vol. 05-57.

Hess, C. M. and Kemerer, C., F. (1994). "Computerized loan origination systems: an industry case study of the electronic markets hypothesis." Vol. 18, 251-275.

Holland, C. P. and Lockett, A. G. (1997). "Mixed Mode Network Structures: The Strategic Use of Electronic Communication by Organizations." Organization Science, Vol. 8, 475-488.

Horn, H. andWolinsky, A. (1988). "Bilateral Monopolies and Incentives for Merger." RAND Journal of Economics, Vol. 19, 408-19.

Inderst, R. and Wey, C. (2003). "Bargaining, Mergers, and Technology Choice in Bilaterally Oligopolistic Industries." RAND Journal of Economics, Vol. 34, 1-19.

Inderst, R. andWey, C. (2007). "Buyer Power and Supplier Incentives." European Economic Review, Vol. 51, 647-67.

Jaikumar, R. (1986). "Postindustrial manufacturing." Harvard Business Review, Vol. 64, 69-76.

Johnston, H. R. and Vitale, M. R. (1988). "Creating Competitive Advantage with Interorganizational Information Systems." MIS Quarterly, Vol. 12, 153-165.

Kim, T., Röller, L.-H. and Tombak, M. M. (1992). "Strategic Choice of Flexible Production Technologies and Welfare Implications: Addendum et Corrigendum." Journal of Industrial Economics, Vol. 40, 233-35.

Kraemer, K. and Dedrick, J. (2001). "Dell Computer: Using E-commerce To Support the Virtual Company." Center for Research on Information Technology and Organizations. Globalization of I.T. Paper 236.

Kranton, R. and Minehart, D. (2004). "Vertical Merger and Speci.c Investments: A Tale of the Second Best". Working Paper.

Kulatilaka, N. and Marks, S. G. (1988). "The Strategic Value of Flexibility: Reducing the Ability to Compromise." American Economic Review, Vol. 78, 574-80.

Lancaster, K. (1990). "The Economics of Product Variety: A Survey." Marketing Science, Vol. 9, 189-206.

Lin, Y. J. (1990). "The Dampening-of-Competition E¤ect of Exclusive Dealing." Journal of Industrial Economics, Vol. 39, 209-23.

Matutes, C. and Regibeau, P. (1989). "Standardization across Markets and Entry." Journal of Industrial Economics, Vol. 37, 359-71.

Milgrom, P. and Roberts, J. (1990). "The Economics of Modern Manufacturing: Technology, Strategy, and Organization." American Economic Review, Vol. 80, 511-28.

Milliou, C. and Petrakis, E. (2007). "Upstream Horizontal Mergers, Vertical Contracts, and Bargaining." International Journal of Industrial Organization, Vol. 25, 963-87.

Norman, G. and Thisse, J.-F. (1999). "Technology Choice and Market Structure: Strategic Aspects of Flexible Manufacturing." Journal of Industrial Economics, Vol. 47, 345-372.

Petkova, V. T. 2003. An analysis of .eld feedback in consumer electronics industry. Eindhoven, Technische Universiteit Eindhoven.

PwC (2007)."Premium Brand Analysis Why, where and who? And what it means for Saab and Volvo." PwC Automotive Institute, mimeo.

Rey, P. and Stiglitz, J. E. (1988). "Vertical Restraints and Producers.Competition." European Economic Review, Vol. 32, 561-68.

Rey, P. and Tirole, J. (1986). "The Logic of Vertical Restraints." American Economic Review, Vol. 76, 921-39.

Rey, P. and Tirole, J. (2006). "A Primer on Foreclosure." Forthcoming in Handbook of Industrial Organization III edited by Armstrong, M. and Porter, R.

Röller, L.-H. and Tombak, M. M. (1990). "Strategic Choice of Flexible Production Technologies and Welfare Implications." Journal of Industrial Economics, Vol. 38, 417-31.

Salant, S. W., Switzer, S. and Reynolds, R. J. (1983). "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium." Quarterly Journal of Economics, Vol. 98, 185-99.

Salinger, M. A. (1989). "The Meaning of .Upstream.and .Downstream.and the Implications for Modeling Vertical Mergers." Journal of Industrial Economics, Vol. 37, 373-87.

Spengler, J. (1950). "Vertical Integration and Anti-Trust Policy." Journal of Political Economy, Vol. 58, pp. 347-352.

Van Biesebroeck, J. (2006). "Trends and complementarities in the Canadian Automobile Industry." NBER WORKING PAPER SERIES, Vol. 12131.

VDA (2004). "Auto annual report 2004". Frankfurt am Main, Verband der Automobilindustrie e.V.

Ziss, S. (1995). "Vertical Separation and Horizontal Mergers." Journal of Industrial Economics, Vol. 43, 63-75.