A STRATEGIC RATIONALE FOR CAPTIVE SUPPLIES

Partial backward integration is prevalent in many agricultural and natural resource processing industries. A strategic rationale for partial backward integration is developed for a dominant firm with a competitive fringe purchasing from competitive input suppliers. A partially backward integrated dominant firm potentially can increase profit through production efficiency gains and through a lower price for externally purchasing input. The optimal degree of backward integration results when the dominant firm's profit from exerting monopsony market power in the external spot market equals its profit from producing raw input internally, less the incremental cost of acquiring internal raw input production capacity. Comparative statics results are consistent with recent empirical studies of the beef packing industry.


Subject(s):
Issue Date:
1999-07
Publication Type:
Journal Article
PURL Identifier:
http://purl.umn.edu/30868
Published in:
Journal of Agricultural and Resource Economics, Volume 24, Number 1
Page range:
1-18
Total Pages:
18




 Record created 2017-04-01, last modified 2017-08-24

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