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

Bilotkach, Volodymyr, Quality Coordination in a Model of Vertical Integration (September 2006). Available at SSRN: https://ssrn.com/abstract=929867 or http://dx.doi.org/10.2139/ssrn.929867

Volodymyr Bilotkach (Contact Author)

Newcastle Business School ( email )

208, City Campus East-1
Newcastle upon-Tyne, NE1 8ST
United Kingdom