Quality Coordination in a Model of Vertical Integration
25 Pages Posted: 13 Sep 2006
Date Written: September 2006
Abstract
We consider a model of vertical integration with firms choosing prices and quality. We consider two specifications for the quality of the composite good: 'bottleneck' and additive setups. In both cases, a vertically integrated monopolist may produce lower quality as compared to dual ownership, if the latter is modeled as a single-stage quality-and-price setting game. When separate markets for components of the composite good are added to the model, we provide an example where dual ownership leading to higher quality also yields higher consumer surplus (but not total welfare) than a single vertically integrated monopolist.
Keywords: Vertical Integration, Complementary Products, Quality
JEL Classification: D21, D42, L22
Suggested Citation: Suggested Citation
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