Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
Home

About this journal
   Aims and scope

   Editorial board

Submit your article

Archive

Search

Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

PROFIT TRANSFER WITHIN A VERTICAL RELATIONSHIP

Vol.28, No.4, December , 61–99



  •   (School of Economics, Chung-Ang University)

PDF
Abstract  

We consider a vertical relationship between a single upstream firm and a single downstream firm and examine the economic effects of the profit transfer program, where the downstream firm transfers a predetermined share of its profit to the upstream firm. We analyze the effects under two scenarios, according as how the price is determined in the upstream market. One is where the upstream firm sets the price of the intermediate good and the downstream firm takes the price as given. The other is where the downstream firm acts as a monopsonist and sets the price of the intermediate good. In the former scenario, the profit transfer alleviates the problem of `double marginalization' and enhances economic efficiency. The downstream firm will hire more intermediate good and will produce more output. And the upstream firm will increase the effort level to reduce the production cost. The consumer surplus and the social welfare will rise. On the other hand, in the latter scenario, the profit transfer has opposite effects. It induces the downstream firm to hire less intermediate good. The upstream firm's effort level to reduce the production cost decreases. As a result, the output of the final good, the consumer surplus, and the social welfare decrease. We will also examine how the profit transfer affects the individual firms' profits.


Keywords
   Profit Transfer, Upstream Frim, Downstream Firm, Double Marginalization, Monopsony

JEL classification codes
   D4, L1
Links

KCI list
Korean ES
JETEM at SCOPUS

Powered by MathJax