An analysis on competition game between oligopoly suppliers and vertical integration manufacturers

Vertical integration refers to one of the options that firms make decisions in the supply of oligopoly market. It was impacted by competition game between upstream firms and downstream firms. Based on the game theory and other previous studies,this paper built a dynamic game model of two-stage competition between the oligopoly suppliers of upstream and the vertical integration firms of downstream manufacturers. In the first stage, it analyzed the influences on integration degree by prices of intermediate goods when an oligopoly firm engages in a Bertrand-game if outputs are not limited. Moreover, it analyzed the influences on integration degree by price-diverge of intermediate goods if outputs were not restricted within a Bertrand Duopoly game equilibrium. In the second stage, there is a Cournot duopoly game between downstream specialization firms and downstream integration firms. Their marginal costs are affected by the integration degree and their yields are affected either under indifferent manufacture conditions. Finally, prices of intermediate goods are determined by the competition of upstream firms, the prices of intermediate goods affect the changes of integration degree between upstream firms and downstream firms. The conclusions can be referenced to decision-making of integration in market competition.