Dear Wei, I think that there is literature in economics on everything, but you are right that horizontal competition attracts more attention in IO literature.

I once was thinking about vertical relationship and even found double monopolization, and wrote, but never presented a paper about that. For example, imagine monopolistic generator of electricity in some remote region and only one HV line to the city. Then both can charge monopolistic price with double abuse of consumers, even if they are different firms (not integrated legally). Similar pairs of monopolistic producer and transporter can exist in many other cases.

Your question force me to think about the the implicit reasons for more (or less) emphasis in certain areas of I/O. A few of things come to mind and I am sure other Scholars will add more:

I hope this helps. 

Rob

Is there a kind of misunderstanding? Wei Li used the word "IO" in the meaning of Industrial Organization. Rob Catlett may have taken it as Input Output. Am I wrong?

As Wei Li classified this question first in the category of International Trade, I would like to answer the question from the view point of International Trade Theory (ITT).

In ITT, horizontal competition and specialization were initially studied. Ricardo and Heckscehr-Ohlin theories are two of them. Input trade (or trade of materials and parts) was important, even essential,  since the days of the Industrial Revolution in England, because Lancashire imported cotton from America and India without which it cannot be an industrial center of cotton textile. However, there was no theory that treats input trade. 

After 1990's, the input trade or trade in value added is expanding rapidly and it is evermore necessary to have a theory of input trade. There is for the moment only one general theory that can treat input trade. It is the New Theory of International Values.

See

Shiozawa, Y. 2017 The New Theory of International Values: an Overview. In Shiozawa, Oka and Tabuchi (eds.) A New Construction of Ricardian Theory of International Values, Sigapore, Springer. Chap. 1, pp.3-73.

Of course, there are many attempts to analyse input trade but many of them assumed a specific pattern of specialization such as three tier trade models.

The reason why the arrival of the theories of input trade was retarded is explained by the fact that the cost of a product depends not only on the wage rate of the producer's country but also on the wage rate of other countries from which the producer country imports parts and materials.  Therefore, it is necessary to find a set of wage rates for all countries at the same moment of deciding specialization pattern.        

Hi Yoshinori,

Thank you for seeking clarification; I was referring to industrial organization.  Your answer adds an interesting twist when it focuses on international trade.

Rob 

Dear Professor Yegorov,

Thank you very much for your reply and I am sorry I didn’t express my whole idea exactly. As you know, IO theory did pay some attention to vertical relationship (VR) and there are lots of literatures in this topic. But most of these studies limited their research interests to vertical integration (VI) or vertical control (VC). What I want to say or to assure is that the scope of VR research is much broader than VI and VC. Just as in the example you have given, there is no VI and VC relationship, but there is VR between generator and HV line. What’s more important is that this VR has changed some conclusions about market performance (double monopolization is worse than monopolization in your example) which is achieved in neoclassical theory that didn’t take VR into consideration. So I want to know whether we can form a theoretical framework to study VR just as traditional theory did on competition theory. And what cause market efficiency loss under the VR and how to deal with it (For example, if one input price increase then the downstream can collude to increase their prices but attribute it to the increase of input price).

Wei

 Hi Professor Catlett,

Thank you so much for your kind answer which has inspired me a lot. It seems that economic practice or demand plays a crucial role in the research of IO, I believe this is the implication of your first two point. I agree one reason why less attention is paid to vertical relationship (VR) is the practice demand for such a theory to explain reality. Just as I said in the reply to Prof Yegorov’s answer, what I want to do is introduce VR into the analytical framework and check whether the classical conclusions will change and how to change, and also what implication of these changes has on our economic theory and practice. Does it sound meaningful to do so?

Dear Prof Shiozawa,

Thank you for your reply and I did use IO to refer to Industrial Organization. I found your answer introduced me another perspective of view to think my question. And I also appreciate the reference you kindly give me. I’ll read them and try to find some hints to solve my question. Thank you so much.

Hi Wei,

Thank you for your kind words. Your approach sounds reasonable; however, I might add an additional point to what both of us have already written.  Some areas of exploration are more fruitful than others. Some areas are more settled than others and sometimes the (high) quality of work preempts additional exploration in an area.  Vertical relationships (VR) may be one of these areas.  

Sometimes we can find interesting and useful work in other areas.  For example, I sat in an antitrust law class for fun in my Ph.D. program and VR have significant and detailed coverage with respect to US case law.  The professor in this class had an economics background and was a former Assistant U.S. Attorney for the United States Department of Justice.  If you ever get the chance, you might find interesting reading in this area on how industrial organization theory is put into practice. We used Phillip Areeda's text and if you can find a copy, I suspect you will be amazed at the real-world applications.  Phillip E. Areeda died in the mid 1990's and I am not sure what his coauthors may have done.

Thanks again,

Rob

Dear Rob, 

thank you for your clarification. This was the first time that I saw expression I/O in the meaning of Industrial Organization. I have seen many of the same expression for Input-Output Analysis.

You wrote in the last comment that 

• I sat in an antitrust law class for fun in my Ph.D. program and VR have significant and detailed coverage with respect to US case law.

It is very interesting. I wonder if the IO theory is also used in Japanese justice procedure.

Yoshinori

Hi Yoshinori,

I am not sure about the Japanese justice system; however, the I was amazed at the extensive use if microeconomics and industrial organization in the US justice system. Early in my career, I  was in conference sessions with Frederic Scherer, Walter Adams, and others; they enhanced my interest in industrial organization and antitrust.

Rob

Dear Rob,

American justice is based on common law.  Japanese justice system is based on legislation. The court plays a very narrow part in the conflict settlement. This may make a big difference.  If then, a similar argument can be heard in the legislation process, but in reality such discussion seems rare. (I am not very sure about this. This is only my impression.)

Yoshinori