The Reason And Behavior Research Of Downstream Vertical Integrate Based On Intermediate Product Quality

With economic development, the increasing of circuitous extent of the economic activities and the industrial chain,the social division of labor between the level of collaboration is also deepening. These improve social labor productivity and lead to compete for profit of division of labor to the upstream and downstream enterprise. When the market structure of the upstream and downstream enterprise is asymmetric and intermediate product quality of the upstream and downstream enterprise is asymmetric, the upstream enterprises have motive and condition of provide low quality products. Thus with the specialization ongoing, it is era which the quality of the intermediate product continues to highlight the problem. From the raw material of the enterprise to the raw material of the food processing, almost every industry chain has intermediate product quality problems, but the degree of emergence is different. The typical representative of the intermediate product quality is "the melamine" which happened in2008. The downstream enterprise may suffer a loss of profit due to the final product quality problem, once the upstream enterprise provides low quality intermediate products. How to solve the quality problem of intermediate product for firm? Can the downstream firm solve this problem by vertical integration? What arc the conditions of vertical integration? The paper explores the incentives and behavior of the downstream enterprise vertical integration from the angle of middle product quality.The contents of this research are divided into the following parts:(1) the reasons of the downstream enterprise integration are analyzed from the middle product quality problem. The implementation of integration mainly has two causes. The first is that high quality-product has been removed. The second is the endogenous transaction cost of the firm. The high quality product is removed, because the market structure of the upstream and downstream and the product quality information is asymmetric. The increased transaction cost is test cost and the reduce quantity of the profit.(2)The paper analyzes the condition of integration which the downstream firm implemented by the mathematical model. The paper discusses the choice of the downstream firm which faces part low quality products and all low quality products when the downstream firm are monopoly、duopoly and n oligarchs.(3) The paper proves several basic views by case. There are following several basic research conclusions through the above analysis-.(1) The market structure of the upstream and downstream is symmetrical. When the upstream firm is a scattered market, and the downstream firm is monopoly or oligarchs, the downstream firm has price advantage. It leaded to that the upstream and downstream firm on profit is not symmetrical in industry chain.(2) When the upstream and downstream firm market structure asymmetry caused the uneven distribution of profits, it became true that the upstream firm provided low quality intermediate products because of the intermediate product goods’experience characteristic.(3) Although the low quality of the middle product leads to decrease downstream firms’profits and increase endogenous transaction cost. But only low quality of middle product seriously affects the downstream firms’ economic profits, the downstream firm can realize the importance of product quality, and take the relevant strategies to eliminate them.(4) The downstream firm solve the quality problem of middle product by backward integration follow three principles:first, vertical integration can reduce the marginal production cost of middle product; second, the profit of vertical integration is bigger than the profit from random market transaction; third, the high quality intermediate products can greatly improve the capacity of the final product and market share.