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Vertical Integration versus Vertical Separation: An Equilibrium Model

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  • Cyrenne, Philippe

Abstract

Abstract. 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 Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28746.

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Date of creation: 27 Oct 1993
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Handle: RePEc:pra:mprapa:28746

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Keywords: Vertical integration; vertical separation; differentiated products.;

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  1. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  2. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Rey, Patrick & Stiglitz, Joseph, 1988. "Vertical restraints and producers' competition," European Economic Review, Elsevier, Elsevier, vol. 32(2-3), pages 561-568, March.
  4. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  5. Perry, Martin K., 1989. "Vertical integration: Determinants and effects," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 4, pages 183-255 Elsevier.
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