Vertical Integration of Successive Monopolists: A Classroom Experiment
Perspectives on Economic Education Research, Vol. 5, No. 1, Spring 2009
Posted: 3 Mar 2009
This classroom experiment introduces students to the concept of double marginalization, i.e., the exercise of market power at successive vertical layers in a supply chain. By taking on roles of firms, students determine how the mark-ups are set at each successive production stage. They learn that final retail prices tend to be higher than if the firms were vertically integrated. Students compare the welfare implications of two potential solutions to the double marginalization problem: acquisition and franchise fees. The experiment also can stimulate a discussion of two-part tariffs, transfer pricing, contracting, and the Coase theorem.
Keywords: double marginalization, monopoly, franchising, contracting, vertical integration, classroom experiments
JEL Classification: A20, C91, D21, D42
Suggested Citation: Suggested Citation