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On the benefits of contractual inefficiency in quality-differentiated markets

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  • Emanuele Bacchiega
  • Olivier Bonroy

Abstract

Contractual inefficiencies within supply chains increase an input price above its marginal cost, therefore they are considered detrimental to consumer surplus. We argue that such inefficiencies may be beneficial to consumers in quality-differentiated markets. Indeed, enhancing contractual efficiency in high-quality supply chains may adversely affect the market structure by driving low-quality vertical chains out of the market and consequently reduce consumer surplus. Due to the finiteness property, (counter-)integration in the low-quality channel does not allow this channel to be in business. Our result holds irrespective of whether the contractual inefficiencies originate from the double marginalization or the ‘commitment effect’.

Suggested Citation

  • Emanuele Bacchiega & Olivier Bonroy, 2015. "On the benefits of contractual inefficiency in quality-differentiated markets," Oxford Economic Papers, Oxford University Press, vol. 67(3), pages 846-863.
  • Handle: RePEc:oup:oxecpp:v:67:y:2015:i:3:p:846-863.
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    Cited by:

    1. Lambertini, Luca, 2018. "Coordinating research and development efforts for quality improvement along a supply chain," European Journal of Operational Research, Elsevier, vol. 270(2), pages 599-605.
    2. L. Lambertini, 2016. "Coordinating R&D efforts for quality improvement along a supply chain," Working Papers wp1054, Dipartimento Scienze Economiche, Universita' di Bologna.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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