Vertical Integration of Successive Monopolists: A Classroom Experiment

Perspectives on Economic Education Research, Vol. 5, No. 1, Spring 2009

Posted: 3 Mar 2009

See all articles by Narine Badasyan

Narine Badasyan

Virginia Polytechnic Institute & State University - Department of Economics

Jacob K. Goeree

University of Zurich

Monica E. Hartmann

University of St. Thomas - Department of Economics

Charles A. Holt

University of Virginia - Department of Economics

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group

Tanya Rosenblat

University of Michigan at Ann Arbor - School of Information

Maroš Servátka

Macquarie Graduate School of Management - MGSM Experimental Economics Laboratory

Dirk Yandell

University of San Diego - School of Business Administration

Abstract

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

Badasyan, Narine and Goeree, Jacob K. and Hartmann, Monica E. and Holt, Charles A. and Morgan, John and Rosenblat, Tanya and Servátka, Maroš and Yandell, Dirk, Vertical Integration of Successive Monopolists: A Classroom Experiment. Perspectives on Economic Education Research, Vol. 5, No. 1, Spring 2009. Available at SSRN: https://ssrn.com/abstract=1352090

Narine Badasyan

Virginia Polytechnic Institute & State University - Department of Economics ( email )

3021 Pamplin Hall
Blacksburg, VA 24061
United States

Jacob K. Goeree

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/jgoeree.html

Monica E. Hartmann

University of St. Thomas - Department of Economics ( email )

2115 Summit Ave
St. Paul, MN 55105
United States
651-962-5681 (Phone)
651-962-5682 (Fax)

Charles A. Holt

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Rouss Hall #114
Charlottesville, VA 22904-4182
United States
(804) 924-7894 (Phone)

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2669 (Phone)
810-885-5959 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/rjmorgan/

Tanya Rosenblat

University of Michigan at Ann Arbor - School of Information ( email )

304 West Hall
550 East University
Ann Arbor, MI 48109-1092
United States

HOME PAGE: http://www.tanyarosenblat.org

Maroš Servátka

Macquarie Graduate School of Management - MGSM Experimental Economics Laboratory ( email )

Sydney
Australia

Dirk Yandell (Contact Author)

University of San Diego - School of Business Administration ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

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