A Study On The Cooperation In Vertical Relationship

The production of any product or service should be involved from obtaining raw materials to the process of the distribution and sale of the final products. This vertical chain of industry is also known as vertical relationship. Under the condition of market system, the most important strategy for the enterprise’s decision is how to organize and coordinate the vertical relations. How to choose the cooperation model in vertical relationship is the first thing. As the rising of new institutional economics, the vertical relationship of economics has been payed attention to and accepted generally.In the research on vertical relationship in traditional industrial organization theory, the factors that affect the choices of cooperation mode in vertical relationship include cost function, the market demand function, industrial organization structure, enterprise competition behavior, and so on. Economists often focused on the analysis of a single enterprise or a single market. They make evaluation on the efficiency of monopoly profits and welfare loss with the benchmark of competitive equilibrium results, applying this to analyze the change in cooperation mode in vertical relationship because of different competition strategies of each enterprise in the market. This creates some limitations to the theoretical results, and cannot form a complete framework in this theoretical system. This paper attempts to make the vertical relationship as a whole and to discuss the stability under the framework of cooperative game. The stability based on this framework also stands for the efficiency of the vertical relationship. While the study on the efficiency of vertical relationship in the framework of non-cooperative game follows the predecessors’ideas.We will make the vertical integration, vertical disintegration and vertical modularity as the research object, in which vertical disintegration is referring to the theory of vertical restraints. We make the cooperation behavior in enterprise as an important starting point, and discuss the selection from the different cooperation modes in vertical relationship, the stability and the efficiency in different choices. This paper includes seven chapters, which are introduced as follows:The first chapter is the introduction, which puts forward to the background of the study, the significance of the study, the framework, the research ideas and methods, and the innovation of the study.The second chapter introduces the theory of vertical integration, vertical disintegration and vertical modularity, and also discusses and reviews the causing reasons, the background and the advantages and the disadvantages. We also make reviews from the vertical integration to vertical disintegration, from vertical disintegration to vertical modularity. The above introduction laid a theoretical foundation for this study.The third chapter illustrates several key problems in the study of cooperation in vertical relationship. Firstly is the explaining of the analyses views, which discuss the proposal in a cooperative game framework. We make the connected enterprises in the vertical relationship as a whole and discuss the feasibility of its stability under the framework of cooperative game. And then analyzes the feasibility of its efficiency under the framework of non-cooperative game. Secondly we explain two evaluation criteria in the cooperative research of vertical relationship. Finally we make general comparisons with cooperative patterns in different vertical relationship, and interpret some influence factors of the cooperation in vertical relationship.The fourth chapter analyzes the stability in the framework of cooperative game based on the perspective of the whole vertical industry chain. The purpose to use the cooperative game is to set up the efficiency of the vertical relationship, which evaluate it by making the relations as a whole and analyze the stability of them. This chapter takes the parties of vertical relationship as a union, considering how to build a different alliance between participants in order to realize the goal of the agreement. In the framework of cooperative game we consider how the cooperation pattern forms between the vertical relationship, what are the vertical relationship alliances, as well as how to allocate their benefit. First of all, based on the modularization theory of Baldwin & Clark and Merton financial options theory we explore the relationship in the evolution of vertical integration to vertical modularity, the stability is enhanced; Secondly we use Shapley value distribution method, which can promote the stability in income allocation method, to the distribution of different parties in vertical relationship. We find that when the market structure is bilateral monopoly, the use of Shapley value method in vertical disintegration and vertical modularity maintains the same welfare level as in the vertical integration, and also can improve the stability of the alliance. Finally, we use the one-to-one static matching model and random matching model in cooperative game to discuss the stability of the vertical alliance. The one-to-one matching method is applied to illustrate that the intermediary outside the vertical relations also plays an important role due to the efficiency of good matching in the corresponding vertical relationship. The relation between the intermediary and the alliance is promoted by each other. With the cooperation patterns’evolution from vertical integration to vertical disintegration and then to vertical modularity, the intermediary also evolves from managers to mediation and then to professional intermediary. The participation of the intermediary and its specialization makes the participants in vertical relationship tend to be in a perfect competition. Through the random matching model we analyze advantages and disadvantages of different cooperation modes when they coexist and can be affected by the supervisory cost and risk assessment of the participants. When the discount factor δ is small and each participant have a big risk assessment, the participants tend to choose vertical integration. With δ increases, the participants tend to choose the vertical disintegration and vertical modularity rather than the integration, but vertical modularity can bring higher returns.The fifth chapter analyzes the vertical relationship based on efficiency perspective in the framework of non-cooperative game. It is based on the traditional theory, which analyzes the vertical relationship from the efficiency of the single market to the whole of vertical relationship. When the enterprises in the vertical relationship form respective market structure, they choose different competition strategies, whose summation can have an impact on the overall market structure of the cooperation mode. In the application of non-cooperative game theory to evaluate the efficiency of the cooperation in vertical relationship, we chose four kinds of different circumstances. Firstly we analyze from the views the externality and the market power based on new classical economic. Secondly the research is based on the transaction cost in new institutional economics. Finally the cooperation modes of different vertical relationship are compared based on the strategy choice in the management.It is mainly divided into the following four aspects:firstly, based on the viewpoint of the externality theory, vertical integration is no longer the best choice with the market structure of the enterprise in vertical relationship becoming complete. Vertical disintegration and vertical modularity eliminate vertical externality along with the change of the market competition degree, which avoid the market distortions caused by double marginalization and the welfare loss. Secondly, based on the perspective of market power, the choices of different cooperation modes in vertical relationship depend on the market power of the enterprise in the market. It shows that vertical integration cannot always increase corporate profits. When enterprise has a strong market power before the integration it can increase the profit by integration, otherwise, the enterprise will choose vertical separation. And the enterprise will choose cooperation modes of vertical disintegration and vertical modularity with the degree of marketization. Thirdly, based on the perspective of transaction cost in the analysis, we consider the management cost and contract cost when both the upstream and the downstream are monopoly. The analysis illustrates there is certain limitation in the traditional vertical integration’s lowering the price of the final product. Fourthly, we analyze the market strategy through the oligopoly model and find that the vertical modularity has the negative effect on the vertical integration strategy, which is along with the change of vertical integration into vertical modularity. It also increases the efficiency of each enterprise in vertical relationship and the total social welfare.The sixth chapter discusses the stability and efficiency of cooperation in vertical relationship by the case study of the vertical relationship in bank card industry. The participants in the vertical relationship here include the cardholder, special merchants, card issuers and bankcard organization or other third-party payment platforms. Through the analysis of the participants’choices of cooperation modes in vertical relationship, we find that China Unionpay make vertical integration change in to vertical disintegration, which greatly improves the stability and efficiency of the whole vertical industry. Due to the market structure the participants faced has become specialization of modular organization, the vertical relationship change from vertical disintegration, which is restricted by China Unionpay to vertical modularity. Because of many modular organizations’permeating into different markets of vertical relationship, China Unionpay’s monopoly will be restricted to a certain extent, and even has been broken. The formation of vertical modularity made up the low efficiency which is caused by China Unionpay, which increases stability and efficiency of cooperation in vertical relationship of the bank card industry.The seventh chapter points out the basic conclusions of this paper and the further thinking of the study.