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Vertically Linked Industries, Product Quality and Minimum Quality Standards

Author

Listed:
  • Hofmann Annette

    (Hamburg School of Business Administration,Hamburg, Germany)

  • Oldehaver Gunnar

    (Warth & Klein Grant Thornton,Hamburg, Germany)

Abstract

This paper extends the seminal model of vertical product differentiation by Ronnen (1991) to a two-tier supply chain. While Ronnen considers the duopoly case, we add a vertical structure such that each downstream firm procures an input from a monopolistic upstream supplier. While simultaneous up- and downstream regulation in the form of a minimum quality standard restores Ronnen’s findings, if only one firm is regulated in the vertical chain, a free-rider effect results: all the bargaining power is given to the non-regulated member of the chain, which uses it to free-ride on the pressure exerted by the regulator onto the other member.

Suggested Citation

  • Hofmann Annette & Oldehaver Gunnar, 2016. "Vertically Linked Industries, Product Quality and Minimum Quality Standards," German Economic Review, De Gruyter, vol. 17(1), pages 92-103, February.
    • Handle: RePEc:bpj:germec:v:17:y:2016:i:1:p:92-103
    DOI: 10.1111/geer.12067
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