Differentiated duopoly under vertical relationships with communication costs
AbstractPlatform sharing across manufacturers has recently become common practice in the automobile industry. Its important objective is to reduce procurement costs by taking advantage of the commonality of components, but this often reduces the degree of product differentiation. We investigate this trade-off through analyzing a model that incorporates manufacturer-supplier relationships with communication costs into a standard differentiated duopoly model, and find an interesting inverse relationship between the advantage of platform sharing and the costs for manufacturers to communicate with their potential suppliers. The result suggests that the information-technology revolution could be a reason for the recent prevalence of platform sharing in the automobile industry, and predicts that similar phenomena would prevail in various other industries as the IT revolution makes further progress. We then consider an extension of our model that incorporates an option for the manufacturers to jointly establish a B2B electronic marketplace in order to reduce their communication costs, and explore its welfare implications. Although the joint establishment of an e-marketplace could be viewed as an anticompetitive activity, we find that in our framework it increases welfare.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Industrial Organization with number 0207008.
Date of creation: 08 Aug 2002
Date of revision:
Note: Type of Document - pdf; prepared on IBM PC; to print on HP;
Contact details of provider:
Web page: http://184.108.40.206
Communication cost; differentiated duopoly; electronic commerce; electronic marketplace; manufacturer-supplier relationships; platform sharing; product differentiation;
Find related papers by JEL classification:
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lynne Pepall & George Norman, 2001.
"Product Differentiation and Upstream-Downstream Relations,"
Journal of Economics & Management Strategy,
Wiley Blackwell, vol. 10(2), pages 201-233, 06.
- George Norman & Lynne Pepall, 2000. "Product Differentiation and Upstream-Downstream Relations," Discussion Papers Series, Department of Economics, Tufts University 0010, Department of Economics, Tufts University.
- David Lucking-Reiley & Daniel F. Spulber, 2000.
"Business-to-Business Electronic Commerce,"
Vanderbilt University Department of Economics Working Papers
0016, Vanderbilt University Department of Economics.
- Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, vol. 91(3), pages 485-508, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.