Strategic Vertical Market Structure with Opaque Products

28 Pages Posted: 7 Jan 2012 Last revised: 23 Aug 2012

Mariano E. Tappata

University of British Columbia - Sauder School of Business, Strategy and Business Economics Division

Date Written: July 2012

Abstract

This paper studies the strategic introduction of an opaque channel by incumbent firms. We endow a circular city model with an intermediary that sells lotteries (opaque products) over goods produced by upstream firms. Compared to the benchmark model (Salop, 1979), opaque intermediation creates value (welfare) by increasing the intensity of price competition and expanding industry sales, but the effect on the value captured by the firms is ambiguous. We show that firms can use the opaque intermediary as a facilitating device to price discriminate and increase profits when the degree of product differentiation takes intermediate values. As an example, we consider the use of opaque intermediaries in markets exposed to seasonal demand. The value captured by the firms increases if the lower profits due to intense competition when demand is high are outweighed by the benefits of expanding the extensive margin when demand is low.

Keywords: Vertical market structure, Opaque products, Circular city, Intermediation, Price discrimination

JEL Classification: D43, L11, M31

Suggested Citation

Tappata, Mariano E., Strategic Vertical Market Structure with Opaque Products (July 2012). Available at SSRN: https://ssrn.com/abstract=1980970 or http://dx.doi.org/10.2139/ssrn.1980970

Mariano E. Tappata (Contact Author)

University of British Columbia - Sauder School of Business, Strategy and Business Economics Division ( email )

2053 Main Mall
Vancouver B.C., BC V6T-1Z2
Canada
1 (604) 822 8355 (Phone)

Paper statistics

Downloads
69
Rank
276,720
Abstract Views
444