Business Intelligence

Product Differentiation And Vertical Integration In Presence Of Double Marginalization

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Executive Summary

In this paper, the authors present a model of endogenous vertical integration and horizontal differentiation. There exist two output brands and two versions of the input. The only mean for output differentiation is the input version used in output production. Firms may choose to vertically integrate to produce internally the required input version at marginal cost, rather than to buy it at the market price, if that version is made available. They show that vertical mergers increase the possibility that output goods are differentiated. Moreover, this occurs when the cost to differentiate the input is high. On the other hand, vertical integration is detrimental for brand variety if the cost to differentiate inputs is negligible.

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