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Differentiated duopoly under vertical relationships with communication costs

Author

Listed:
  • Arghya Ghosh

    (School of Economics, University of New South Wales)

  • Hodaka Morita

    (School of Economics, University of New South Wales)

Abstract

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.

Suggested Citation

  • Arghya Ghosh & Hodaka Morita, 2002. "Differentiated duopoly under vertical relationships with communication costs," Industrial Organization 0207008, EconWPA.
  • Handle: RePEc:wpa:wuwpio:0207008
    Note: Type of Document - pdf; prepared on IBM PC; to print on HP;
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    References listed on IDEAS

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    1. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Lynne Pepall & George Norman, 2001. "Product Differentiation and Upstream-Downstream Relations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(2), pages 201-233, June.
    3. 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.
    4. 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.
    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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    Cited by:

    1. Jesús F. Lampón & Pablo Cabanelas & Javier González Benito, 2015. "The impact of implementation of a modular platform strategy in automobile manufacturing networks," Working Papers. Collection B: Regional and sectoral economics 1502, Universidade de Vigo, GEN - Governance and Economics research Network.
    2. Lampón, Jesús F. & Cabanelas, Pablo & Frigant, Vincent, 2017. "The new automobile modular platforms: from the product architecture to the manufacturing network approach," MPRA Paper 79160, University Library of Munich, Germany.

    More about this item

    Keywords

    Communication cost; differentiated duopoly; electronic commerce; electronic marketplace; manufacturer-supplier relationships; platform sharing; product differentiation;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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