Supply chain competition and the welfare effects of partial ownership

Abstract

We study the competition and welfare effects of upstream partial ownerships (UPO) in a framework with two competing supply chains and downstream firms choosing their product positionings strategically. We find that UPO reduces downstream product differentiation and thus intensifies downstream competition. Unlike the standard results of Bertrand competition, we find that downstream prices can be strategic substitutes even when downstream firms compete in Bertrand fashion. More importantly, we show that UPO increases consumer surplus and social welfare, even when double marginalization increases downstream prices. The competition and welfare results from downstream partial ownerships (DPO) are just the opposite to those from UPO. Our findings have clear managerial and policy implications.