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WHY DO LARGE FIRMS TEND TO INTEGRATE VERTICALLY?

Authors


Noriaki Matsushima, Institute of Social and Economic Research, Osaka University, Mihogaoka 6-1, Ibaraki, Osaka 567-0047, Japan. Tel: +81-6-6879-8571, Fax: +81-6-6879-8583. Email: nmatsush@iser.osaka-u.ac.jp. The authors would like to thank the editor and an anonymous referee for their constructive and helpful comments, and also the seminar participants at Tohoku University for their helpful comments. The authors gratefully acknowledge financial support from the Ministry of Education, Science, Sports and Culture, Grant-in-Aid for Scientific Research (C) (21530243), Young Scientists (B) (21730193), and Start-up. Any errors are the responsibility of the authors.

ABSTRACT

We provide a theoretical framework to discuss the relation between firm size and vertical structures. The framework is based on a Hotelling model with three downstream and three upstream firms. We show that vertical integration enhances the degree of product differentiation and show the strategic complementarity of product positioning. We also show that the downstream firm that has the largest market share is more likely to integrate vertically. Enhancing the degree of product differentiation is more beneficial for the large firm than for the rest of the downstream firms because the large firm supplies a large amount of product.

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