Double Marginalization and Vertical Integration

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