Vertical collaboration network: Stability and efficiency

We study the stability and efficiency of vertical collaboration networks from a microeconomic viewpoint. An example of a vertical collaboration network is contracts between a cell phone carrier and terminal manufacturers in the mobile telecommunication industry. While offering various cell phone terminals makes a telecommunication service more attractive, multilateral contracts by a terminal manufacturer with several carriers may cause consumers to experience dissatisfaction, since this leads to the homogenization of services offered by firms. On the other hand, however, a specific link between a carrier and terminal manufacturer can succeed in creating some value synergy, which results in differentiation from other services, even if the manufacturer multilaterally contracts with other carriers. In consideration of such effects, we analyze the strategic formation of vertical collaboration networks by utilizing a game theoretic approach. We first show that in the absence of value synergy in regard to collaboration, a network where only a single carrier exclusively contracts with every terminal manufacturers can be both stable and efficient, unless the cost of forming a link is too low. In other words, a monopolistic collaboration with a single telecommunication service is indeed socially optimal. However, as the cost of establishing a link decreases, each firm increases its collaborative links as possible. This leads to a "prisoner's dilemma", that is, the complete homogenization of the resulting services. We show that creating value synergy can contribute to avoiding this inefficient outcome. In the presence of high degree of synergy, the unique stable outcome is the network where each carrier exclusively contracts with only manufacturers who yield value synergy. Indeed, this coincides with the unique efficient network.