Passive Partial Forward Ownership and Strategic Trade Policy in Vertically Related Industries

Forward ownership allows upstream suppliers to internalize part of downstream profit, but its implications for strategic trade policy under competition between independent supply chains remain unclear. This paper develops a three-stage third-market model with two exclusive vertical supply chains whose upstream suppliers are located in the Rest of the World. Solving the model for general passive ownership shares, we compare no ownership (NN), unilateral ownership (YN), and bilateral ownership (YY). Within the maintained interior region, forward ownership lowers intermediate-input prices, mitigates double marginalization, and increases aggregate output; bilateral ownership produces the lowest input prices and the highest total output. Nevertheless, all three regimes yield export taxes because upstream operating profit and ownership income are excluded from the exporting countries’ welfare. Under YN, the affiliated downstream producer’s operating profit rises, whereas the profit retained by its original domestic shareholders, excluding the acquisition payment, falls. A fixed-transfer stability test shows that a mutually acceptable acquisition payment exists only when the ownership share is sufficiently small. These results distinguish the input-pricing effect of forward ownership from the welfare effect of domestic upstream-rent internalization: the former changes the magnitude of equilibrium policies, but without the latter, it does not reverse export taxation.