A New Study by a Scientist from Pusan ​​National University Eases the Choice of Organizational Structure in Vertically Linked Markets

BUSAN, South Korea, January 25, 2022 /PRNewswire/ — In an era of market volatility and increased risk, organizations are choosing to diversify their product lines to build resilience. Part of this diversification also includes reassessing the organizational structure of the business. But does organizational structure affect a company using multiple vendors to manufacture multiple products, especially when considering exclusive vendor contracts? A new study conducted by Pusan National University The scientist says yes.

Have you ever seen Coca Cola and Pepsi served in the same restaurant? No? This is because the two companies tend to favor “exclusive agreements”, a business relationship in which suppliers can only supply a specific customer and vice versa. An important question to consider, from an economics perspective, is how exclusive dealing arrangements would impact organizational forms.

Two common forms of organization are the unitary form (U) and the multidivisional form (M). As their names suggest, the U form has a single central management unit that coordinates different departments while the M form consists of several decentralized semi-autonomous units. A U-shaped company, with its single management unit, could provide overall profit incentives, while an M-shaped company could instead incentivize its divisions by having them compete against each other. In vertically linked (niche) markets, the choice of organizational form becomes critical, and it is worth asking how it can be optimized.

In a recent study published in the Economics ReviewProfessor Kangsik Choi from Busan National University, Republic of Korea, explored this issue, taking into account exclusivity agreements. “Based on observations of real examples, it was evident that including exclusives in Cournot competition would yield interesting results, not only on the organizational forms of competing firms, but also on social welfare. ,says Professor Choi. “Cournot competition” refers to an economic model that describes a market where firms compete on the basis of their total output.

For his study, Professor Choi developed a model in which two suppliers supply two types of parts to two downstream companies, so that each uses the parts to make two different products. Using game theory, he then analyzed each firm’s performance under three conditions: binding exclusivity, in which suppliers and firms choose the price of parts to maximize joint profits, non-binding exclusivity, binding, in which only the suppliers choose the price, and partial exclusivity, in which one party is supplied exclusively to the downstream company and the other is not.

He found that the U form was the dominant strategy under partial and binding exclusivity, while the M form was preferred for non-binding exclusivity. Moreover, he observed that there was more social welfare and consumer surplus in the U-shaped model under partial exclusivity and vice versa. “My new method enables better decisions on organizational forms, which enables companies to take better action regarding industrial organization in a vertically linked market than existing methods.“, says Professor Choi.”Theoretical studies like this can help us better understand the platform market.”

The new model based on extending exclusive agreements has multiple applications in a variety of industries, including technology, aerospace, automotive, beverage and more.


Title of the original article: Delegation in multi-product downstream companies with heterogeneous sectors

Newspaper: Economics Review

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

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

Na-hyun Lee
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SOURCEPusan National University