Speaker
Description
This paper develops a theory to illustrate the relationship between the profitability of firms producing along the value chain and the sequential production stages. Using a bilateral monopoly framework, it interrogates the validity of the U-shaped curve (often called the “smile curve”) regarding the firm-level division of the gains in the global supply chains. In order to resolve the potential problems of double
marginalisation and hold-up phenomenon, we use quantity fixing contracting choice as a way of vertical restraint to eliminate the incentives for vertical integration in the supply chain as well as the indeterminacy of prices stemming from the problems of bilateral monopoly. Our findings indicate that the U-shaped relationship is not universally valid. It depends on the interaction between the capability effects and cost effects of firms producing along the chain. From the consumption side, the variation of firm’s bargaining power determines the profitability distribution along the chain, whereas labour costs and the elasticity of endogenous sunk cost with respect to the quality level of intermediate goods play a counterpart role in determining the profit sharing from the perspective of the production side. The empirical results based on the WIOD confirm our theoretical predictions.
