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Vertical Differentiation with Partial Share in Revenue and Profit

Author

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  • Swati Singla

    (Department of Economics, Delhi School of Economic)

  • Vishruti Gupta

    (Department of Economics, Delhi School of Economic)

Abstract

We examine duopoly competition between firms with asymmetric quality, wherein firms compete sequentially in quality and price. We find that the partial shareholding of the high-quality firm in revenue (or profit) of the low-quality firm softens the competition. The market share of the high-quality firm decreases as the percentage of the share in revenue (or profit) increases. Further, we find that the improvement in quality by high-quality firm is lesser than by low-quality firms. The price charged by the high-quality firm is higher than that of the low-quality firm as the high-quality firm continues to have the quality advantage. Comparing the two scenarios, revenue sharing is more desirable than profit sharing for firms, giving higher total profits.Consumers and social planner prefer profit sharing between the firms as it leads to a higher surplus.

Suggested Citation

  • Swati Singla & Vishruti Gupta, 2024. "Vertical Differentiation with Partial Share in Revenue and Profit," Working papers 353, Centre for Development Economics, Delhi School of Economics.
    • Handle: RePEc:cde:cdewps:353
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    References listed on IDEAS

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    1. Shelegia, Sandro & Spiegel, Yossi, 2012. "Bertrand competition when firms hold passive ownership stakes in one another," Economics Letters, Elsevier, vol. 114(1), pages 136-138.
    2. Florian Ederer & Bruno Pellegrino, 2022. "A Tale of Two Networks: Common Ownership and Product Market Rivalry," NBER Working Papers 30004, National Bureau of Economic Research, Inc.
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