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Product Differentiation and Upstream-Downstream Relations

  • George Norman


  • Lynne Pepall


This paper examines the relationship between a differentiated downstream market and a specialized upstream market. We analyze three different types of vertical relation between the upstream and downstream sectors when the upstream market supplies specialized and complementary inputs to a downstream product-differentiated market. The first is the benchmark case of decentralized markets, the second is a network of alliances among upstream suppliers, and the third is partial vertical integration. We identify the perfect equilibrium for a symmetric model in each case and show that there is no simple relationship between the degree of connection between upstream and downstream firms and profitability. The key factor affecting prices and the relative profitability of the different market organizations is the degree of product differentiation among the downstream firms, because it affects the intensity of competition among upstream suppliers. We show that vertical foreclosure is not an equilibrium strategy. Copyright (c) 2001 Massachusetts Institute of Technology.

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Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0010.

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Date of creation: 2000
Date of revision:
Handle: RePEc:tuf:tuftec:0010
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  1. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Géarard Gaudet & Ngo Long, 1996. "Vertical Integration, Foreclosure, and profits in the Presence of Double Marginalization," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 409-432, 09.
  3. Bolton, Patrick & Whinston, Michael D, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 121-48, January.
  4. Nicholas Economides, 1997. "The Economics of Networks," Industrial Organization 9701002, EconWPA.
  5. repec:cup:cbooks:9780521335263 is not listed on IDEAS
  6. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-42, March.
  7. repec:cup:cbooks:9780521335522 is not listed on IDEAS
  8. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  9. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
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