Quality Choice and Vertical Integration

Posted: 25 Aug 1998

See all articles by Nicholas Economides

Nicholas Economides

New York University - Leonard N. Stern School of Business - Department of Economics

Date Written: October 1997

Abstract

We show that, despite coordination in the quality level of the components that they provide, independent vertically-related (disintegrated) monopolists will provide products of lower quality level than a sole integrated monopolist. Further, the integrated monopolist achieves higher market coverage, higher consumer surplus, and higher profits.We establish these results for any distribution of preferences in the standard model of quality differentiation. Despite the lower quality, we also show that, for a wide class of cost functions, price will be higher in a market of independent vertically-related monopolists. All results are the effects of the interaction of double- marginalization, occurring in the market of independent monopolists, with the choice of quality.

JEL Classification: D4, L1

Suggested Citation

Economides, Nicholas, Quality Choice and Vertical Integration (October 1997). NYU Working Paper No. EC-94-22, International Journal of Industrial Organization, Vol. 17, pp. 903–914, 1999, Available at SSRN: https://ssrn.com/abstract=6562 or http://dx.doi.org/10.2139/ssrn.6562

Nicholas Economides (Contact Author)

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