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Welfare-improving vertical separation with network externality

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  • Choi, Kangsik
  • Lee, DongJoon

Abstract

Considering the interplay between network externalities and the degree of product substitutability in a vertical structure, we compare the outcomes of vertical integration and vertical separation. In contrast to previous results, we show that when both products are sufficiently close substitutes, there is a threshold level of the network externality parameter, beyond which vertical separation is more efficient than vertical integration. This is due to the internalization of the network externality by a multiproduct monopolist, which, in the balance between the extensive and intensive margin, leads to higher output prices.

Suggested Citation

  • Choi, Kangsik & Lee, DongJoon, 2017. "Welfare-improving vertical separation with network externality," Economics Letters, Elsevier, vol. 151(C), pages 115-118.
    • Handle: RePEc:eee:ecolet:v:151:y:2017:i:c:p:115-118
    DOI: 10.1016/j.econlet.2016.12.024
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    Cited by:

    1. Leonard F. S. Wang & Qiang Gong & Ji Sun, 2024. "Vertical cross‐ownership, double marginalization, and social welfare," Bulletin of Economic Research, Wiley Blackwell, vol. 76(2), pages 394-408, April.
    2. Tsuritani, Ryosuke, 2024. "Protecting weak suppliers in endogenous vertical structurer," MPRA Paper 122071, University Library of Munich, Germany.
    3. DongJoon Lee & Kangsik Choi & Tatsuhiko Nariu, 2020. "Endogenous vertical structure with network externalities," Manchester School, University of Manchester, vol. 88(6), pages 827-846, December.
    4. Wang, Xingtang & Wang, Leonard F.S., 2021. "Vertical product differentiation, managerial delegation and social welfare in a vertically-related market," Mathematical Social Sciences, Elsevier, vol. 113(C), pages 149-159.
    5. Jen-Yao Lee & Chen-Chia Fan & Chien-Shu Tsai, 2023. "Network Externalities and Downstream Collusion under Asymmetric Costs: A Note," Games, MDPI, vol. 14(2), pages 1-11, March.
    6. Lee, DongJoon & Choi, Kangsik, 2018. "The efficiency of competing vertical chains with network externalities," Economics Letters, Elsevier, vol. 168(C), pages 1-5.

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    More about this item

    Keywords

    Double-margin distortion; Product differentiation; Network externalities; Vertical separation; Vertical integration;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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