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Quality Choice and Vertical Integration

Authors: Economides, Nicholas
Keywords: Quality;Duopoly;Vertical integration
Issue Date: 29-Oct-1997
Series/Report no.: EC-94-22
Abstract: 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. Ó 1999 Elsevier Science B.V. All rights reserved.
Appears in Collections:Economics Working Papers

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