When to choose market foreclosure and vertical mergers with substitutable final products

Purpose Based on the idea of part standardisation and product differentiation in lean management, this paper answers the question when integrate firms should choose market foreclosure to maximise profits by studying a two-tier supply chain, which contains three types of firms: suppliers, manufacturers and integrated firms. Moreover, the effect of the substitutability between final products and the competition among firms in the supply chain would be investigated from the perspective of dynamic analysis. Design/methodology/approach Considering the decision order of integrated firms and manufacturers in the downstream of the supply chain, the authors build three competition models. In each model, integrated firms compete with manufacturers in Bertrand-Nash fashion. And, suppliers compete with each other in Cournot fashion, so do integrated firms and manufacturers. The authors further discuss how the competitive relationship between firms affect the equilibrium result. Findings Numerical analysis reveals that under other conditions unchanged, the increased competition between downstream firms leads to the rise in the willingness of selling parts for integrated firms, while the increase in the number of suppliers has the opposite effect. In addition, due to the market change before and after the vertical merger, it may lead to the transition from profitable to unprofitable for the vertical merger. Originality/value This paper provides a theoretical analysis and managerial implication for integrated firms' market foreclosure decision. From the perspective of dynamic analysis, this paper demonstrates the result of vertical mergers and provides an explanation for the failure of vertical mergers.

Automated summary

This paper examines the decision-making process of integrated firms in a two-tier supply chain, focusing on the choice of market foreclosure to maximize profits when competing with manufacturers. It also investigates the impact of product substitutability and competition among firms on the overall outcomes.