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Vertical separation with location–price competition

Author

Listed:
  • Youping Li

    () (East China University of Science and Technology)

  • Jie Shuai

    () (Zhongnan University of Economics and Law)

Abstract

Abstract While the literature has generally found that vertical separation helps buffer competition and harm consumers in a duopolistic market, we find the exact opposite. To induce the retailers to locate closer to consumers and earn a larger market share, the manufacturers set wholesale prices below marginal cost. This market share effect dominates the previously focused coordination effect under which a higher wholesale price helps coordinate the retailers’ pricing decisions. For each manufacturer, vertical separation is a dominant strategy so the endogenous determination of vertical separation versus vertical integration is a prisoner’s dilemma game.

Suggested Citation

  • Youping Li & Jie Shuai, 2017. "Vertical separation with location–price competition," Journal of Economics, Springer, vol. 121(3), pages 255-266, July.
  • Handle: RePEc:kap:jeczfn:v:121:y:2017:i:3:d:10.1007_s00712-017-0533-9
    DOI: 10.1007/s00712-017-0533-9
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    References listed on IDEAS

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    More about this item

    Keywords

    Vertical separation; Vertical integration; Location–price competition;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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