New Study by Pusan National University Scientist Makes Choosing Organizational Structure in Vertically-Related Markets Easier

BUSAN, South Korea, Jan. 25, 2022 /PRNewswire/ -- In a time of market volatility and increasing risk, organizations are choosing to diversify their product lines in an attempt to build resiliency. Part of this diversification also includes reevaluating the company's organizational structure. But does the organizational structure affect a company using multiple suppliers to make multiple products, especially when one considers exclusive contracts with the suppliers? A new study conducted by Pusan National University Scientist says yes.

Have you ever seen Coca Cola and Pepsi served at the same restaurant? No? That's because both companies tend to prefer "exclusive dealing," a business relationship in which suppliers can only supply a specific customer and vice versa. An important question to consider, from the point of view of economics, is how exclusive dealings would impact organizational forms.

Two common organizational forms are the unitary (U) form and multidivisional (M) form. As their names suggest, the U-form features a single central management unit that coordinates different departments while the M-form consists of multiple decentralized semi-autonomous units. A U-form company, with its single managerial unit, might provide incentives on overall profits, whereas an M-form company might instead incentivize its divisions by making them compete against each other. In vertically-related (niche) markets, the choice of organizational form becomes critical, and it is worthwhile to ask how it can be optimized.

In a recent study published in the Journal of Economics, Professor Kangsik Choi of Pusan National University, Republic of Korea, explored this question, accounting for exclusive dealings. "Based on observations of real-world examples, it was evident that including exclusive dealings into Cournot competition would yield interesting results, not only on the organizational forms of competing firms, but also on social welfare," says Prof. Choi. "Cournot competition" refers to an economic model that describes a market where companies compete based on their total output.

For his study, Prof. Choi developed a model in which two suppliers provided two types of parts to two downstream companies, such that each use the parts to make two different products. Using game theory, he then analyzed the performance of each company under three conditions: binding exclusive dealing, in which suppliers and companies choose the price of parts to maximize joint profits, non-binding exclusive dealing, in which only suppliers choose the price, and partial exclusive dealing, in which one of the parts is provided exclusively to the downstream company and the other is not.

He found that the U-form was the dominant strategy under partial and binding exclusive dealing, whereas the M-form was preferred for non-binding exclusive dealing. Moreover, he observed that there was greater social welfare and consumer surplus within the U-form model under partial exclusive dealing and vice versa. "My new method allows for better decisions on organizational forms, which enables firms to take better actions regarding industrial organization in a vertically-related market compared to the existing methods," explains Prof. Choi. "Theoretical studies such as this one can help us better understand the platform market."

The new model based on the extension of exclusive dealings has manifold applications in a variety of industries, including technology, aeronautics, automotive, beverages and more.

Reference

Title of original paper: Delegation in multiproduct downstream firms with heterogeneous channels

Journal: Journal of Economics

DOI: http://doi.org/10.1007/s00712-021-00752-w

Lab website address: https://sites.google.com/site/kangsikchoi/home
ORCID Id: https://orcid.org/0000-0002-0918-7022

About Pusan National University
Website: https://www.pusan.ac.kr/eng/Main.do

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SOURCE Pusan National University