Effects of Backward Integration in the Real Estate Industry

A Cournot successive Oligopoly Model

Abstract

The Japanese real estate industry is stylized as a vertically related industry under oloigopoly in which the landowners are considered as the upstreamers while the real estate agents are the downstreamers. The downstreamer is an input demander, who considers backward integration with the upstream landowner(s). The so-called fixed proportions in production is assumed to apply to the downstreamers.
The questions of particular interest to the present paper include what happens to the individual profit, aggregate profit, and social surplus after integration, under what conditions. After a brief literature review in Section 2, Section 3 of the paper will show 1) the supply increases with backward integration, and 2) the output effect is smaller when one downstreamer integrates backward with plural upstreamers than it is when one-to one integration is contemplated. Section 4 in turn will demonstrate that economic welfare tends to increase with backward integration, but the effect of backward integration on the joint profits and on social surplus is not definitive in general. However, each (additional) backward integration generally increases the joint profit for the merged.
In sharp contrast, however, the profit for the remaining firms and industry profit as well can be shown to decrease with successive backward integrations. There exist incentives therefore for the excluded firms to integrate to recover their lost profit. Should all such inadvertent integrations have taken place, the paper nevertheless stresses that an alternative strategy still exists for the group of enterprises which cannot go back to the original state of nonintegration. The proposed strategy, we will show, is to form one-to-one backward integrations by establishing more downstream sections.