Cyrenne, Philippe (1993): Vertical Integration versus Vertical Separation: An Equilibrium Model.
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Abstract. In this paper, the role of strategic forces in vertical relationships is examined. Using a simple model of differentiated products with symmetric demands and costs, the Perfect equilibrium to a vertical integration-vertical separation game between manufacturers is determined. Given the assumptions of the model, I show that the manufacturer's decision whether to vertically integrate or to remain separate from its retailer depends on the degree of product differentiation. I show that when the products are poor substitutes, the only Perfect equilibrium is vertical integration by both manufacturers. As the products become closer substitutes, an additional Perfect equilibrium appears, both firms vertically separated. For manufacturers, the vertically separated equilibrium always Pareto dominates the vertical integration equilibrium when both equilibria exist.
|Item Type:||MPRA Paper|
|Original Title:||Vertical Integration versus Vertical Separation: An Equilibrium Model|
|Keywords:||Vertical integration, vertical separation, differentiated products.|
|Subjects:||L - Industrial Organization > L0 - General
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance
|Depositing User:||Philippe Cyrenne|
|Date Deposited:||22. Feb 2011 20:58|
|Last Modified:||18. Feb 2013 00:43|
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