Catherine de Fontenay

A Bargaining Perspective on Strategic Outsourcing and Supply Competition

This paper considers the outsourcing choice of a downstream firm with its own upstream production assets. Using both a standard linear pricing model and a bilateral bargaining approach we examine the equilibrium pricing outcomes that emerge if there are two downstream and two upstream assets. We then characterise the downstream firm’s decision as to whether to outsource to an independent or established upstream firm. In so doing, it faces a trade-off between lower prices afforded by independent competition and higher asset value associated with the consolidation of upstream assets. We show that, while under a standard approach, this choice is resolved in favour of independent upstream production, when efficient, non-linear pricing is feasible, outsourcing is to an established firm. This suggests the importance of pricing structure in evaluating the nature of strategic outsourcing behaviour. Journal of Economic Literature Classification Number: L42This paper considers the outsourcing choice of a downstream firm with its own upstream production assets. Using both a standard linear pricing model and a bilateral bargaining approach, we examine the equilibrium pricing outcomes that emerge if there are two downstream and two upstream assets. We then characterize the downstream firms decision as to whether to outsource to an independent or established upstream firm. In so doing, it faces a trade-off between lower prices afforded by independent competition and higher asset value associated with the consolidation of upstream assets. We show that, while under a standard approach, this choice is resolved in favor of independent upstream production, when efficient, non-linear pricing is feasible, outsourcing is to an established firm. This suggests the importance of pricing structure in evaluating the nature of strategic outsourcing behavior.

Can Vertical Integration by a Monopsonist Harm Consumer Welfare

Vertical integration by a monopsonist is generally believed not to harm consumers. This paper demonstrates, in a natural economic setting, that this conventional wisdom may not hold. We model bargaining between a monopsonist and independent suppliers when it is difficult to write binding long-term supply price contracts. Thus, a vertically separated monopolist is vulnerable to hold-up. Without integration, we demonstrate that a bottleneck monopsonist has an incentive to encourage more firms in a related segment than would arise in a pure neoclassical monopoly. Having more firms mitigates the hold-up power of any one. This, however, distorts the cost structure of the industry toward greater industry output and, hence, lowers final good prices. Vertical integration mitigates the hold-up problem faced by the monopsonist. It allows it to generate and appropriate a greater level of industry profits; largely at the expense of consumers. It is shown that horizontal competition reduces the anti-competitive incentives and harm from integration.

Exclusivity, Competition and the Irrelevance of Internal Investment

This paper considers the effect of exclusive contracts on investment decisions in a market with two upstream and two downstream firms. Segal and Whinstons (2000) irrelevance result is generalised and it is shown that exclusive contracts have no effect on the equilibrium level of internal investment for the contracted parties when competition exists in both the upstream and downstream markets. Furthermore, by considering a more competitive environment we are able to demonstrate that strongly internal investment by rival upstream-downstream bargaining pairs is similarly unaffected by the presence of exclusive contracts.

Extending Market Power through Vertical Integration

This paper derives a model of vertical integration when it is difficult to write binding long-term supply price contracts. Thus, a vertical separated monopolist is vulnerable to hold-up. Without integration, the authors demonstrate that a bottleneck monopolist has an incentive to encourage more firms in a related segment than would arise in a pure monopoly.

Vertical Integration and Competition Between Networks

This paper provides a simple model of bargaining and integration within a network and considers how intra-network structure is impacted on by competition between networks. Apart from its analytical tractability, our model demonstrates how integration can be used strategically to redistribute network profits from downstream firms to upstream providers of network services. It also demonstrates that increased inter-network competition can mitigate incentives for inefficient integration.

The Role of Mobility in Offsetting Inequality: A Nonparametric Exploration of the CPS

This paper explores how annual earnings mobility offsets annual earnings inequality, using matched CPS data. Mobility in the economy is estimated using nonparametric quantile regression, for which we adapt state-of-the-art smoothing techniques. Mobility is measured through the churning process (changes in earnings given initial earnings) in order to identify different mobility patterns for different earnings groups. For instance, upward mobility in high earners is far weaker than its converse, downward mobility for low earners. We assess the (positive or negative) contribution to offsetting of each pattern in mobility. Innovations in our approach also allow us to identify trends and minute changes in mobility, and to pinpoint which changes in mobility have offset the increases in inequality observed over the decades. Copyright 2002 by The International Association for Research in Income and Wealth.

Returns to scale in one-shot information processing when hours count

Abstract. The decentralized information processing approach pioneered by Radner and Van Zandt endogenously determines the optimal hierarchy for decision making within an organization. The simplest information processing model is the one-shot problem (one set of information to process) which serves as the testing ground for ever richer descriptions of managers and their tasks. Meagher and Van Zandt observed that an hours-based measure should be used for calculating managerial costs rather than the fixed cost per employee used by Radner. Surprisingly they show that the set of efficient hierarchies is equivalent under the two different measures.In this paper we show that using the hours-based measure can give quite different results for returns to scale than were found by Radner. We find constant returns to scale over a wide range of delay costs, whereas Radner found increasing returns to scale: In other words, costs rise proportionally with the size of the firms information problem. Constant returns to scale implies that distortions in firm size will not arise from the need for hierarchical organization per se, but rather from organizational issues from the theory of the firm, such as incentives and abilities.

Involuntary Unemployment and Intrafirm Bargaining with Replacement Workers

This paper reconsiders the result of Stole and Zwiebel (1996) that when a firm bargains with its workers over the wages in non-binding contracts, the firm will over-employ workers to reduce the hold-up power of any one. This result has stood in contrast to conclusions drawn in the literature on involuntary employment that bargaining would lead to un- or under-employment. We demonstrate that the Stole-Zwiebel conclusion critically relies on the lack of replacement workers. When insiders can be easily replaced from a finite pool of workers, then the firm chooses to under- rather than over-employ workers. Only when the replacement pool of workers is infinite do neoclassical outcomes occur. Moreover we demonstrate that the key driving force between the differing conclusions of these models is the degree of substitutability between replacement and insider workers.

The Shrinking of Middle Management

We analyse a model in which (1) managers require experience in order to be productive; (2) providing managers with experience is costly and noncontractible. We demonstrate that if there is an increase in the mobility of managers, there may be a free-riding problem, in that each firm has too little incentive to give managers experience. Surprisingly, welfare may be higher in the state of the world with more mobility. We explore individual managers’ incentives to invest in generalizing their skills to improve their mobility.