Economics

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Title:

How did the keiretsu system solve the hold-up problem in the Japanese automobile industry? 

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The Japanese car industry enjoyed a steady expansion path from 1960, following the keiretsu system, the Japanese style of non-vertically integrated system. This is a result of the dissolution of the zaibatsu and is characterized by less internalization and flexible contracts. Other characteristics of the keiretsu include that the buyer of the product can buy the same product from another different keiretsu company, as seen in the Toyota-Denso relationship.The model proposed by this thesis incorporates these additions to the classical hold-up model, proposed by Grossman and Hart (1986) to examine the efficiency of such system.

In particular, the buyer now has an option to partially buy the same product from another company. This introduces implicit competition within the system as seen in the keiretsu relationship. Using backward induction to establish a sub-game perfect Nash equilibrium, I derive a result indicating that efficiency improves from the classic case of a complete non-vertically integrated system when the buyer has high bargaining power over the share of surplus, and that the magnitude of competition within the keiretsu relationship does not affect efficiency, measured by the amount of underinvestment. I also propose a possible extension to the model to further relax the assumption in the model.