Buying Back Subcontractors: The Strategic Limits of Backward Integration

"In a model where a monopolistic downstream firm (assembler) negotiates simultaneously with each of its "n" subcontractors the prices of the complementary components which enter its product, we show that backward integration is limited by a strategic negative effect: the prices and profits of independent suppliers increase when a merger reduces their number. Mergers are profitable only if the downstream firm buys at least two thirds of its suppliers. In an endogenous acquisition game "à la" Kamien and Zang (1990) the only merged equilibrium occurs when there is only one subcontractor. In a sequential acquisition game full integration is not an equilibrium when the number of suppliers is at least five." Copyright (c) 2008, The Author(s) Journal Compilation (c) 2008 Wiley Periodicals, Inc..