Differentiated Duopoly Under Vertical Relationships with Communication Costs

41 Pages Posted: 16 Dec 2004

See all articles by Arghya Ghosh

Arghya Ghosh

UNSW Australia Business School, School of Economics

Hodaka Morita

Hitotsubashi University - Institute of Economic Research

Date Written: September 29, 2004

Abstract

Platform sharing across manufacturers has recently become common practice in the automobile industry. Its important objective is to reduce procurement costs by taking advantage of the commonality of components, but this often reduces the degree of product differentiation. We investigate this trade-off through analyzing a model that incorporates manufacturer-supplier relationships with communication costs into a standard differentiated duopoly model, and find an interesting inverse relationship between the advantage of platform sharing and the costs for manufacturers to communicate with their potential suppliers. The result suggests that the information-technology revolution could be a reason for the recent prevalence of platform sharing in the automobile industry, and predicts that similar phenomena would prevail in various other industries as the IT revolution makes further progress. We then consider an extension of our model that incorporates an option for the manufacturers to jointly establish a B2B electronic marketplace in order to reduce their communication costs, and explore its welfare implications. Although the joint establishment of an e-marketplace could be viewed as an anticompetitive activity, we find that in our framework it increases welfare.

Keywords: Communication cost, differentiated duopoly, electronic commerce, electronic marketplace, manufacturer-supplier relationships, platform sharing, product differentiation

JEL Classification: L14, L22, L40

Suggested Citation

Ghosh, Arghya and Morita, Hodaka, Differentiated Duopoly Under Vertical Relationships with Communication Costs (September 29, 2004). Available at SSRN: https://ssrn.com/abstract=632942 or http://dx.doi.org/10.2139/ssrn.632942

Arghya Ghosh

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Hodaka Morita (Contact Author)

Hitotsubashi University - Institute of Economic Research ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8306
Japan

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