Zhiqi Chen and Thomas Ross

"Cooperating upstream while competing downstream: a theory of input joint ventures"
JEL codes: L13, L42, L23
Keywords: input joint ventures, collusion, strategic alliances

Abstract: Joint ventures in which firms share ownership of a facility that produces an important input have become common. We consider a model in which two parent firms competing in a downstream market set up such a joint venture, analyzing the pricing strategy of this joint venture and the impact of this strategy on downstream competition. We compare the joint venture equilibrium with alternative arrangements where a) the two firms merge; and, b) each firm produces its own input. Among our results, we find that the joint venture can replicate the effects of a full-scale merger of the parents.