Good times, bad times, and vertical upstream integration

In contrast to the polluter-pays principle, environmental taxes are imposed at various points in the chain of production and distribution (e.g., the fuel and regulatory energy taxes in the Netherlands). To discuss the effects of environmental tax burden ratio on economic outcomes, we consider a market where there is one upstream firm and two downstream firms that pollute the environment. The government imposes environmental tax on the upstream and downstream firms at some tax burden ratio. Given the tax burden, the downstream firms invest in pollution-abatement technology. After investment, the upstream firm chooses a wholesale price, and then the downstream firms compete a la Cournot. We obtain the following results: First, the total amount of environmental damage increases with the tax burden in the downstream market if the pollution-abatement technology is inefficient. Second, the profit of downstream firms increases with their tax burden if the tax burden is small. Finally, in the optimal tax burden scenario, both upstream and downstream firms may have to pay tax.

Vertical vs. horizontal integration: Game analysis for the rare earth industrial integration in China

Trade liberalization has a significant impact on the environment and social welfare of countries. In the real world, almost all industries exist upstream and downstream firms but the existing literature on the impact of trade liberalization rarely discuss the interaction between upstream and downstream firms. The goal of this study is to analyze the effects of trade liberalization on the trade policies, environmental policies and social welfare of downstream exporting countries when different pricing schemes (uniform pricing vs. discriminatory pricing) are implemented by upstream monopoly firms. By constructing a three-stage dynamic game model we found that, regardless of pricing schemes, trade liberalization leads to increase both environmental taxes and import taxes. Trade liberalization increases the social welfare of downstream countries under discriminatory pricing, while trade liberalization first reduces and then increases the social welfare of downstream countries under uniform pricing. The results indicate that the downstream countries always have the incentive to participate in trade agreements that integrate markets when discriminatory pricing schemes will be implemented by upstream firms. This finding is the most significant contribution of this paper which has not been addressed in the previous literature.

In a complex economy, production is vertical and crosses jurisdictional lines. Goods are often produced by an upstream national or global firm and improved or distributed by local firms downstream. In this context, heightened products liability may have unintended consequences on product sales and consumer safety. Conventional wisdom holds that an increase in tort liability on the upstream firm will cause that firm to (weakly) increase investment in safety or disclosure. However, this may fail in the real-world, where upstream firms operate in many jurisdictions, so that the actions of a single jurisdiction may not be significant enough to influence upstream firm behavior. Even worse, if liability is shared between upstream and downstream firms, higher upstream liability may mechanically decrease liability of the downstream distributor and encourage more reckless behavior by the downstream firm. In this manner, higher upstream liability may perversely increase the sales of a risky good. We demonstrate this phenomenon in the context of the pharmaceutical market. We show that higher products liability on upstream pharmaceutical manufacturers reduces the liability faced by downstream doctors, who respond by prescribing more drugs than before.

Legal Unbundling Can Be a Golden Mean between Vertical Integration and Separation

Does vertical integration of an input innovator with a downstream firm entail innovation foreclosure? We study the licensing incentives of an independent input producer owning a patented product innovation which allows the downstream firms to improve the quality of their final goods. We consider two-part tariff contracts for both outside and incumbent innovators. We find that the incumbent innovator has always the incentive to license its innovation to the rival firm so that under vertical integration complete technology diffusion takes place. In contrast, the external patent holder may prefer exclusive licensing depending on the innovation size as well as on the set of allowed contracts. As a result vertical integration does not entail innovation foreclosure, rather it facilitates innovation diffusion with respect to vertical separation. As for the profitability, the vertical integration with either downstream firm is always privately profitable and it is welfare improving for large innovations: this implies that not all profitable mergers should be rejected.

One of the key features which promote growth of industrial clusters is collaboration among firms within such clusters. Collaboration among firms leads to the formation of networks. Stability of these networks is vital to the sustainability of the particular firms. In this paper, we model a supply chain network where a set of downstream firms (players) source inputs from upstream firms (players) who manufacture goods, add value to the products and resell them. The upstream firms produce identical goods and compete on quantities to sell these goods to the downstream firms. The upstream firms procure goods from the downstream firms and sell them. Additionally, upstream firms network among themselves so as to reduce their costs. We model this setting as a two-stage [Formula: see text]-player strategic network formation game. Firms decide their links before competing on quantities in the second stage of the game. Using the defined model, we derive equilibrium quantities and profits as a function of the network structure and number of firms. Following which we analyze the conditions under which different stable network emerge. Our analysis brings forth several interesting insights such as higher connections among downstream players lead to increased profits for upstream manufacturers. From the network stability perspective, we obtain the conditions under which regular, star, etc. network structures are pairwise and bilaterally stable. Furthermore, we also find the conditions under which core–periphery network structures emerge and are stable.

Vertical Integration in Sequential Negotiations

As the circular economy advances, green process innovation for recycling (GPIR) has become a promising pathway for emission reduction under cap-and-trade regulations. Unlike green process innovation for manufacturing (GPIM), which focuses on emission reduction during manufacturing stages, GPIR emphasizes lowering carbon emissions and production costs by improving product recycling efficiency and greenness. Given the substantial challenges of innovation, many upstream and downstream firms collaborate on emission reduction initiatives in practice. However, the interaction between upstream firms’ GPIR and downstream firms’ GPIM comes with the challenge of designing collaborative strategies. We analyze two typical cooperative strategies through a game-theoretical approach. We consider a manufacturer engages in GPIM and chooses between a non-cooperative strategy or collaborating with a supplier engaged in product recycling to conduct GPIR, either through cost-sharing or R&D joint-venture. Our main results are as follows. First, while the R&D joint-venture can, under certain conditions, enhance the overall performance of the supply chain, the manufacturer does not favor the R&D joint-venture. The supplier’s cash rebate policy can incentivize the manufacturer to choose the R&D joint-venture. Additionally, higher carbon trading price will drive them to switch from an R&D joint-venture to a cost-sharing strategy. Second, there is a complementary effect between GPIR and GPIM. As a result, the manufacturer’s higher cost-sharing rate does not necessarily prompt the supplier to lower wholesale prices. Third, the demand-enhancing effect from increased green innovation outweighs the demand-reducing effect from higher wholesale prices, allowing the manufacturer to expand sales even with high sourcing costs.

We study the impact of positive and negative macroeconomic U.S. and European news announcements in different phases of the business cycle on the high-frequency volatility of the EUR/USD exchange rate. The results suggest that news effects depend on the state of the economy. In general, news increases volatility more in good times than in bad times. News effects are also asymmetric with respect to sign: negative news increases volatility more in good times than in bad times, while there is no difference between the volatility effects of good news in bad and good times.

In this article we provide the optimal timing and equilibrium terms of a vertical merger with two sources of uncertainty in the production chain, namely, marginal cost of raw material and price level of final product. By eliminating monopoly power and transaction cost in the production process between upstream and downstream firms, a vertical merger can increase social welfare, which is consistent with the literature. The optimal threshold of a vertical merger is negatively correlated with transaction cost in the intermediate product market. Vertical mergers also accelerate when merging provides natural hedging for the postmerger firm, that is, when the correlation between the two uncertainties increases.

In the ICT industry, technical standards frequently incorporate SEPs, which are high-quality and indispensable for standard implementation. These patents play a central role in enabling firms to pursue strategic litigation. This study empirically investigates the relationship between SEP ownership and patent litigation among global ICT firms, with particular attention to the moderating role of sales revenue. The findings indicate that an increase in SEP holdings significantly elevates a firm's likelihood of engaging in litigation as a plaintiff and defendant. Sales revenue positively moderates this relationship, suggesting commercial interests and competitive positioning increasingly drive litigation. Grouped regression analyses reveal that technology leaders experience a stronger positive association between SEP accumulation and litigation activity than followers. Positional asymmetries also emerge: upstream firms are more likely to initiate lawsuits, while downstream firms – particularly large-scale manufacturers – are more frequently targeted due to their structural dependence on upstream technologies. In contrast, vertically integrated firms show lower levels of litigation involvement. These results provide actionable insights for managing SEP-related legal risks in competitive markets.

Declared essential patents and average total R&D expenditures per patent family

Chapter 4 - VERTICAL INTEGRATION IN A SUCCESSIVE OLIGOPOLY WITH VARIABLE PROPORTIONS OF INPUTS

Emergent dynamics of a macroeconomic agent based model with capital and credit