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Effects of technological progress on vertical product differentiation and welfare

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  • Christoph Bauner
  • Nathalie Lavoie
  • Christian Rojas

Abstract

We study the effects of technological progress in upstream agri-food markets on vertical differentiation in a downstream duopoly. The duopolists, who enjoy seller and buyer market power, transform homogeneous agricultural input into goods of varying qualities. We find that a cost-reducing innovation increases differentiation, and this differentiation comes from a sizable decrease in quality of the low-quality firm. The intensification of differentiation results in a market-expansion effect that largely benefits consumers. The distribution of benefits between upstream and downstream industries are consistent with the observation of a decreasing trend in farmers’ share of the retail food dollar.

Suggested Citation

  • Christoph Bauner & Nathalie Lavoie & Christian Rojas, 2017. "Effects of technological progress on vertical product differentiation and welfare," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 44(1), pages 67-97.
    • Handle: RePEc:oup:erevae:v:44:y:2017:i:1:p:67-97.
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    File URL: http://hdl.handle.net/10.1093/erae/jbw012
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    Citations

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    Cited by:

    1. Hennessy, David A. & Zhang, Jing & Bai, Na, 2019. "Animal health inputs, endogenous risk, general infrastructure, technology adoption and industrialized animal agriculture," Food Policy, Elsevier, vol. 83(C), pages 355-362.
    2. Bauner, Christoph & Wang, Emily, 2019. "The effect of competition on pricing and product positioning: Evidence from wholesale club entry," International Journal of Industrial Organization, Elsevier, vol. 67(C).

    More about this item

    Keywords

    vertical differentiation; technological progress; innovation; endogenous quality;
    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

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