Profitable Double Marginalization

28 Pages Posted: 20 Feb 2016 Last revised: 14 May 2016

See all articles by Kevin Bryan

Kevin Bryan

University of Toronto - Strategic Management

Erik Hovenkamp

USC Gould School of Law

Date Written: May 13, 2016

Abstract

When successive monopolies transact through noncooperative linear pricing, the resulting double markup decreases their joint profits relative to vertical integration. However, if there are downstream rivals (which are not double marginalized), the same noncooperative interaction often inadvertently raises their joint profits. Profit effects depend on how the well-understood harm from misaligned interests compares to the value of the resulting strategic effect. When profitable, vertical noncooperation incidentally approximates strategic delegation a la Bonanno & Vickers (1988), but avoids its credibility problem, suggesting an inability to bargain may be indirectly beneficial. The "conjectural consistency" concept helps to explain the disparate profit effects, and to synthesize the literature on strategic delegation and vertical control. The optimal way to "distort" a downstream firm's behavior is always to make it behave as if it has a consistent conjecture, no matter the distortion mechanism. If upstream competitors do this in parallel, they induce a "consistent conjectures equilibrium" (CCE) -- or else a close analogue -- evincing a strong link between ordinary Nash games and the CCE.

Keywords: Double marginalization, double markups, royalty stacking, antitrust, vertical integration, theory of the firm, pricing, vertical restraints, delegation, conjectural variation

JEL Classification: L40, K21, L22, L42, L10, L11, L13, L14, C72, D23, D40, D43

Suggested Citation

Bryan, Kevin and Hovenkamp, Erik, Profitable Double Marginalization (May 13, 2016). Available at SSRN: https://ssrn.com/abstract=2734513 or http://dx.doi.org/10.2139/ssrn.2734513

Kevin Bryan

University of Toronto - Strategic Management ( email )

Canada

Erik Hovenkamp (Contact Author)

USC Gould School of Law ( email )

Los Angeles, CA 90089
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
140
Abstract Views
1,057
rank
205,687
PlumX Metrics