Quality choice and vertical integration

We show that, despite coordination in the quality level of the components that they provide, independent vertically-related (disintegrated) monopolists will provide products of lower quality level than a sole integrated monopolist. Further, the integrated monopolist achieves higher market coverage,...

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Bibliographic Details
Published inInternational journal of industrial organization Vol. 17; no. 6; pp. 903 - 914
Main Author Economides, Nicholas
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.08.1999
Elsevier
North-Holland
Elsevier Sequoia S.A
SeriesInternational Journal of Industrial Organization
Subjects
Choice of products
Duopoly
Economic models
Market structure
Monopolies
Preferences
Pricing policies
Product quality
Profits
Quality
Quality standards
Studies
Vertical integration
D4
Duopoly
L1
Quality
Vertical integration
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Summary:We show that, despite coordination in the quality level of the components that they provide, independent vertically-related (disintegrated) monopolists will provide products of lower quality level than a sole integrated monopolist. Further, the integrated monopolist achieves higher market coverage, higher consumer surplus, and higher profits. We establish these results for any distribution of preferences in the standard model of quality differentiation. Despite the lower quality, we also show that, for a wide class of cost functions, price will be higher in a market of independent vertically-related monopolists. All results are the effects of the interaction of double-marginalization, occurring in the market of independent monopolists, with the choice of quality.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0167-7187
1873-7986
DOI:10.1016/S0167-7187(97)00063-5