No. 15 Brownbag: A Bilateral Monopoly Model of Profit Sharing
Published:2018-05-22 Visits:

No. 15 Brownbag


Topic: A Bilateral Monopoly Model of Profit Sharing Along Global Supply Chains

Speaker: Huangnan Shen , PhD candidate of development economics,  School of Oriental and African Studies, University of London

Host: Yexin Zhou , Associate Professor of the School of Economics and Resource Management, BNU

Time:  12:00-13:30pm, May. 29th 2018

Venue: Rm 1710, Hou-Zhu-Lou, Beijing Normal University


Introduction of speaker

Huangnan Shen, Ph.D. candidate of Development Economics, School of Oriental and African Studies, University of London, Master of Economics Management, the London School of Economics and Political Science. He is a teaching assistant in management economics, econometrics, corporate finance and financial strategy at the School of Oriental and African Studies at the University of London currently. His research interests include development economics, international trade, industrial organization and organizational economics. He has received the department prize in Managerial Economics, Mathematics from the London School of Economics and Political Science, and the Research Scholarship from the School of Oriental and African Studies, University of London. In recent years, he mainly used Game Theory, Contract Theory and Industrial Organization Methods to study the reform of China's large state-owned enterprises. He is a member of the China State-owned Enterprise Research Group of the China Modern State-owned Enterprise Research Institute of Tsinghua University. He is also a member of the editorial board of the "Modern Management Forum". For now, He has published many articles in the Fudan Journal of Humanity, Social Science, LSE Economic History Working Series and SOAS Economics Working Series.



This paper investigates the firm-level division of the gains in the global supply chain and provides a new theoretical framework to explain how gains are divided among firms and interdependent nations within the chain. It constructs an economic model using a bilateral monopoly market structure to analyse how the average profitability varies with the stages in the chain. By introducing a vertical restraint known as quantity fixing, the double marginalization problem arising as a result of bilateral monopoly can be resolved. It demonstrates joint-profit maximizing contracts emerge under quantity fixing parameters whereby the Assembly and downstream retailer eliminate the incentives for vertical integration.


This paper also shows the downstream retailer is more profitable than the upstream retailer if (and only if) both the capability and cost effect of Retailer dominates the two counterpart effects of Manufacturer. For the dominance of capability effect, the retailer must have higher monoposonistic market power in the intermediate inputs market than in the final goods market where it acts as a monopolist. As a result, it could extract more surplus from manufacturer rather than consumers. In terms of cost effect, the factor endowment structure differentials are important to the model. The labour intensive nature of the Manufacturer would lead it to the lower average product of labour, generating a lower level of profitability compared with upstream Retailer which is more capital intensive with higher average labour productivity. Extend it to a quantitative framework, the theories generated by this paper are broadly consistent with the data.


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China Institute of Innovation and Development, BNU

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