Input production joint venture Gianpaolo Rossini and Cecilia Vergari University of Bologna

1. Input production joint ventureGianpaolo Rossini and Cecilia VergariUniversity of Bologna ASSET Annual Conference, Istanbul 29-31 October 2009 Rossini - Vergari IPJV 2009 Unibo

2. Index • Facts • Definition of IPJV • The antitrust stance towards IPJV • Aim • Main results with oligopoly • Epilogue Rossini - Vergari IPJV 2009 Unibo

3. FACTS In most industries firms delegate production of an essential input to an independent venture carried out in cooperation with one (or more) firm(s) competing in the downstream market for the final good Rossini - Vergari IPJV 2009 Unibo

4. EX 1: Chemicals giants jointly own plants where ethylene and basic components for plastics are manufactured (recent agreement between Dow and Kuwait Petroleum Corporation, Hewitt, 2008). • EX 2: In the electronic industry Sony jointly produces with rival Sharp liquid crystal displays Rossini - Vergari IPJV 2009 Unibo

5. DEFINITION OF Input Production Joint Venture (IPJV) Joint ventures devoted to the manufacturing of an essential input, owned and governed on an equal foot by delegates of firms operating and competing among each other in the Downstream (D) section of the vertical chain of production. Rossini - Vergari IPJV 2009 Unibo

6. ANTITRUST STANCE • Even though IPJV is a kind of partial collusion, not much antitrust complain and suit: "Courts typically have analyzed true production joint ventures under the rule of reason and generally have upheld them". The stance of antitrust authorities should be evaluated also on the basis of the instability of IPJV (one half of joint ventures end in a divorce, Hewitt, 2008, p.12). Rossini - Vergari IPJV 2009 Unibo

7. AIM • Assess feasibility, private and/or social desirability of IPJV considering also static uncertainty. • Stability of IPJV, i.e., the incentives for firms to disengage or to join the plot of companies doing IPJV Rossini - Vergari IPJV 2009 Unibo

8. MAIN RESULT • IPJV privately preferred to VI for high competition in the D product market (zero fixed costs). A fortiori, with positive fixed costs, since IPJV eliminates wasteful replication. Rossini - Vergari IPJV 2009 Unibo

9. The oligopoly investigation • Linear demand function and constant (increasing) returns (if fixed cost >0). • Complete VI or IPJV: all n firms are vertically integrated or all n firms use JIPV • Partial IPJV: some do VI, some do IPJV Rossini - Vergari IPJV 2009 Unibo

10. Proposition 4: private and social efficiency - For high levels of differentiation (low b(n)) the private ranking is: VI  partial IPJV  complete IPJV - For low levels of product differentiation the private ranking is: complete IPJV  partial IPJV  complete VI Rossini - Vergari IPJV 2009 Unibo

11. Social ranking SWVI SWPJ  SWJ PJ = partial IPJV Rossini - Vergari IPJV 2009 Unibo

12. Interpretation • With IPJV the D firms are able to compensate the lost profit in D with the monopoly profit obtained by the single independent U producer Rossini - Vergari IPJV 2009 Unibo

13. Disengagement and Nash equilibria Hewitt (2008) 50% JV end in a divorce PROPOSITION 6 (sorting Nash equilibria) • For high differentiation the adoption of VI by all firms is a NE. • For low differentiation IPJV is a NE • For intermediate differentiation partial IPJV is a NE, if VI firms compensate D firms to give up walking away from IPJV Rossini - Vergari IPJV 2009 Unibo

14. Profit volatility • Cournot IPJV profits are less volatile than VI, • Betrand: the contrary holds and risk sharing along the vertical chain in IPJV. Rossini - Vergari IPJV 2009 Unibo

15. Epilogue • Favorable stance of antitrust to JIPV is not entirely justified. • IPJV privately preferred to VI even in the absence of wasteful duplication of fixed costs. Incentives to IPJV increase with downstream competition. • social inefficiency (even if it allows for savings in fixed cost). • empirical relevance of IPJV for ability to survive and disengagement incentives Rossini - Vergari IPJV 2009 Unibo