Network Structures in Industrial Pricing: The Effect of Emergent Roles in Tokyo Supplier-Chain Hierarchies

Tsutomu Nakano, Graduate School of International Management, Aoyama Gakuin University, and Center on Organizational Innovation, Columbia University
Douglas R. White, Institute for Mathematical Behavioral Sciences, UC Irvine, and Santa Fe Institute

Download the Paper (PDF format) - December 30, 2007 Tell a colleague about it. Get Acrobat Reader Submit a "Reader's Comment" Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing. This work has been peer reviewed.

ABSTRACT:

Given data on supplier chains in a Tokyo industrial district, we show how network structures such as monopsony (uniqueness of buyers) may affect noncompetitive pricing. To address the distribution of these biases we show how two types of emergent roles in hierarchically organized production chains affect noncompetitive price diffusion both horizontally and vertically in the industrial hierarchy. More concretely our model addresses such questions as how it is that, as in the case of this specific industrial hierarchy, processing activities and parts and components manufacturing organized by the “elite” buyers for the top manufacturers, while executed by numerous smaller enterprises lower in Ohta hierarchy, leave so many low-level suppliers subject to monopsony. Monopsony and monopoly (and to a lesser extent, duopoly and duopsony) are structures that may severely reduce profit margins. We use two complementary frameworks to pose and address such questions. One is network economics where monopsony and duopsony and their potential effects on pricing are well defined, like those of monopoly and duopoly. The other is network sociology, where we can define more fundamental concepts of the network construction of social and economic processes and institutions and the effects of network structure in transactional situations. We regard both frameworks as necessary to modeling elements of global and regional economies.