Hold-up and Repeated Interaction: The Case of Complementary Monopoly
Suppose consumers buy complementary goods sequentially from several monopolists. If prices cannot be contracted on, there may be no sale in a one-shot game due to the holdup problem. Dynamic interaction of agents attenuates the problem. In equilibrium, the first and the last monopolist capture the entire monopoly profit while the other monopolists break even. Vertical integrations that exclude the last monopolist neither lower the price nor increase social welfare. On the other hand, partial integrations that include the last monopoly can reduce the combined profit and hence may never occur despite the welfare-improving potential.
|Date of creation:||Feb 2007|
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