Double Marginalization and Vertical Integration

51 Pages Posted: 1 Mar 2021 Last revised: 4 Feb 2022

See all articles by Philippe Choné

Philippe Choné

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); CESifo (Center for Economic Studies and Ifo Institute)

Laurent Linnemer

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Thibaud Vergé

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Date Written: February 2021

Abstract

Double marginalization is a robust phenomenon in procurement under asymmetric information when sophisticated contracts can be mplemented. In this context, vertical integration causes merger-specific elimination of double marginalization but biases the make-or-buy decision against independent suppliers. If the buyer has full bargaining power over prices and quantities, a vertical merger benefits final consumers even when it results in the exclusion of efficient suppliers. If on the contrary the buyer's bargaining power is reduced after she has committed to deal exclusively with a limited set of suppliers, exclusion of efficient suppliers harms final consumers.

Keywords: Asymmetric information, Bargaining, Double marginalization, Optimal procurement mechanism, Vertical merger

JEL Classification: D4, D8, L1, L4

Suggested Citation

Choné, Philippe and Linnemer, Laurent and Vergé, Thibaud, Double Marginalization and Vertical Integration (February 2021). CEPR Discussion Paper No. DP15849, Available at SSRN: https://ssrn.com/abstract=3795233

Philippe Choné (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Laurent Linnemer

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Thibaud Vergé

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

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