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Differentiated duopoly under vertical relationships with communication costs

  • Arghya Ghosh

    (School of Economics, University of New South Wales)

  • Hodaka Morita

    (School of Economics, University of New South Wales)

Platform sharing across manufacturers has recently become common practice in the automobile industry. Its important objective is to reduce procurement costs by taking advantage of the commonality of components, but this often reduces the degree of product differentiation. We investigate this trade-off through analyzing a model that incorporates manufacturer-supplier relationships with communication costs into a standard differentiated duopoly model, and find an interesting inverse relationship between the advantage of platform sharing and the costs for manufacturers to communicate with their potential suppliers. The result suggests that the information-technology revolution could be a reason for the recent prevalence of platform sharing in the automobile industry, and predicts that similar phenomena would prevail in various other industries as the IT revolution makes further progress. We then consider an extension of our model that incorporates an option for the manufacturers to jointly establish a B2B electronic marketplace in order to reduce their communication costs, and explore its welfare implications. Although the joint establishment of an e-marketplace could be viewed as an anticompetitive activity, we find that in our framework it increases welfare.

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Paper provided by EconWPA in its series Industrial Organization with number 0207008.

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Date of creation: 08 Aug 2002
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Handle: RePEc:wpa:wuwpio:0207008
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  1. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  2. George Norman & Lynne Pepall, 2000. "Product Differentiation and Upstream-Downstream Relations," Discussion Papers Series, Department of Economics, Tufts University 0010, Department of Economics, Tufts University.
  3. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. David Lucking-Reiley & Daniel F. Spulber, 2001. "Business-to-Business Electronic Commerce," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 55-68, Winter.
  5. Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, vol. 91(3), pages 485-508, June.
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