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On the Benefits of Contractual Inefficiency in Quality-Differentiated Markets

20 Pages Posted: 28 Apr 2012 Last revised: 20 Feb 2013

Emanuele Bacchiega

University of Bologna - Department of Economics

Olivier Bonroy

National Institute for Agricultural Research (INRA) - Grenoble Applied Economic Laboratory; University of Grenoble

Date Written: February 14, 2013

Abstract

Contractual inefficiencies within supply chains increase an input price above its marginal cost, therefore they are considered detrimental to consumer surplus. We argue that such inefficiencies may be beneficial to consumers in quality-differentiated markets where the "finiteness property" holds. Indeed, enhancing efficiency in high-quality supply chains through vertical integration may adversely affect the market structure by driving low-quality chains out of the market, and, consequently reduce consumer surplus. Due to the finiteness property, (counter-)integration in the low-quality channel does not allow this channel to be in business. Our result holds both with secret and public contracts, and with buyer power.

Keywords: Vertical product differentiation, vertical integration, linear tariff, two-part tariff, consumer surplus.

JEL Classification: L13, L22, L4

Suggested Citation

Bacchiega, Emanuele and Bonroy, Olivier, On the Benefits of Contractual Inefficiency in Quality-Differentiated Markets (February 14, 2013). Available at SSRN: https://ssrn.com/abstract=2047004 or http://dx.doi.org/10.2139/ssrn.2047004

Emanuele Bacchiega (Contact Author)

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
40126 Bologna, 40125
Italy
+390512098486 (Phone)
+390512098493 (Fax)

Olivier Bonroy

National Institute for Agricultural Research (INRA) - Grenoble Applied Economic Laboratory ( email )

BP47
38040 Grenoble Cedex
France

University of Grenoble ( email )

Grenoble
France

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