Value chain structure and flexible production technologies

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.