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On the benefits of contractual inefficiency in quality-differentiated markets

Author

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  • Bacchiega, E.
  • Bonroy, O.

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

  • Bacchiega, E. & Bonroy, O., 2014. "On the benefits of contractual inefficiency in quality-differentiated markets," Working Papers 2014-06, Grenoble Applied Economics Laboratory (GAEL).
  • Handle: RePEc:gbl:wpaper:2014-06
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    File URL: https://gael.univ-grenoble-alpes.fr/sites/gael/files/doc-recherche/WP/A2014/gael2014-06.pdf
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    References listed on IDEAS

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    1. Marco Pagnozzi & Salvatore Piccolo, 2012. "Vertical Separation with Private Contracts," Economic Journal, Royal Economic Society, vol. 122(559), pages 173-207, March.
    2. Claire Chambolle & Sofia Villas-Boas, 2007. "Buyer Power through Producer's Differentiation," Working Papers hal-00243058, HAL.
    3. Paul Belleflamme & Eric Toulemonde, 2003. "Product differentiation in successive vertical oligopolies," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 523-545, August.
    4. Chrysovalantou Milliou & Apostolis Pavlou, 2013. "Upstream Mergers, Downstream Competition, and R&D Investments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(4), pages 787-809, December.
    5. Avenel, E. & Caprice, S., 2006. "Upstream market power and product line differentiation in retailing," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 319-334, March.
    6. Bonroy, Olivier & Lemarié, Stéphane, 2012. "Downstream labeling and upstream price competition," European Economic Review, Elsevier, vol. 56(3), pages 347-360.
    7. Salinger, Michael A, 1991. "Vertical Mergers in Multi-product Industries and Edgeworth's Paradox of Taxation," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 545-556, September.
    8. Roberto Hernán González & Praveen Kujal, 2012. "Vertical integration, market foreclosure and quality investment," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 11(1), pages 1-20, April.
    9. Avenel, Eric, 2003. "Strategic vertical integration without foreclosure," Royal Economic Society Annual Conference 2003 11, Royal Economic Society.
    10. de Fontenay, Catherine C. & Gans, Joshua S., 2004. "Can vertical integration by a monopsonist harm consumer welfare?," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 821-834, June.
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    Cited by:

    1. repec:eee:ejores:v:270:y:2018:i:2:p:599-605 is not listed on IDEAS
    2. L. Lambertini, 2016. "Coordinating R&D efforts for quality improvement along a supply chain," Working Papers wp1054, Dipartimento Scienze Economiche, Universita' di Bologna.

    More about this item

    Keywords

    VERTICAL PRODUCT DIFFERENTIATION; VERTICAL INTEGRATION; LINEAR TARIFF; TWO-PART TARIFF; CONSUMER SURPLUS;

    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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