Vertical Integration versus Vertical Separation: An Equilibrium Model
AbstractAbstract. In this paper, the role of strategic forces in vertical relationships is examined. Using a simple model of differentiated products with symmetric demands and costs, the Perfect equilibrium to a vertical integration-vertical separation game between manufacturers is determined. Given the assumptions of the model, I show that the manufacturer's decision whether to vertically integrate or to remain separate from its retailer depends on the degree of product differentiation. I show that when the products are poor substitutes, the only Perfect equilibrium is vertical integration by both manufacturers. As the products become closer substitutes, an additional Perfect equilibrium appears, both firms vertically separated. For manufacturers, the vertically separated equilibrium always Pareto dominates the vertical integration equilibrium when both equilibria exist.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 28746.
Date of creation: 27 Oct 1993
Date of revision:
Vertical integration; vertical separation; differentiated products.;
Find related papers by JEL classification:
- L0 - Industrial Organization - - General
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
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