Inferring the Effects of Vertical Integration from Entry Games : An Analysis of the Generic Pharmaceutical Industry

This paper introduces a novel method for examining the effects of vertical integration. The basic idea is to estimate the parameters of a vertical entry game. By carefully specifying firms' payoff equations and constructing appropriate tests, it is possible to use estimates on rival profit effects to make inferences about the existence of vertical foreclosure. I estimate the vertical entry model using data from the US generic pharmaceutical industry. The estimates indicate that vertical integration is unlikely to generate anticompetitive foreclosure effects. On the other hand, significant efficiency effects are found to arise from vertical integration. I use the parameter estimates to simulate a policy that bans vertically integrated entry. The simulation results suggest that such a ban is counterproductive; it is likely to reduce entry into smaller markets.

A New Measurement for International Fragmentation of the Production Process: An International Input-Output Approach

The paper investigates the possibility of constructing a new measurement for analysing international fragmentation of the production process. It asserts that the current usage of relevant data, whether the trade shares of parts and components or the index of Vertical Specialisation, is quite unsatisfactory for measuring the phenomenon, since they critically lack the overall perspective of the entire structure of production chains. 　The new measurement is formulated such that it captures every aspect of the vertical sequence of production linkages. It is based on the input-output model of Average Propagation Lengths, recently developed by Eric Dietzenbacher and others, which show the average number of production stages that are passed through for an exogenous change in one industry to affect another. By applying this model to the data of the Asian International Input-Output Tables, the index is able to measure the international dimension of production sharing and division of labour in East Asia.

Vertical specialisation indicator based on supply-driven input-output model

“Import content of exports”, based on Leontief’s demand-driven input-output model, has been widely used as an indicator to measure a country’s degree of participation in vertical specialisation trade. At a sectoral level, this indicator represents the share of inter-mediates imported by all sectors embodied in a given sector’s exported output. However, this indicator only reflects one aspect of vertical specialisation – the demand side. This paper discusses the possibility of using the input-output model developed by Ghosh to measure the vertical specialisation from the perspective of the supply side. At a sector level, the Ghosh type indicator measures the share of imported intermediates used in a sector’s production that are subsequently embodied in exports by all sectors. We estimate these two indicators of vertical specialisation for 47 selected economies for 1995, 2000, 2005 using the OECD’s harmonized input-output database. In addition, the potential biases of both indicators due to the treatment of net withdrawals in inventories, are also discussed.