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Endogenous quality choice under upstream market power

Author

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  • Borja Mesa Sánchez

    (Dpto. Fundamentos del Análisis Económico)

Abstract

This paper analyzes how the existence of upstream market power affects endogenous quality choice in a setting where two downstream firms are locked in a bilateral monopoly with their own input suppliers. The main result is that the degree of product differentiation is reduced as upstream market power increases. This holds under Bertrand and Cournot competition, although differentiation is higher in the former. If competition takes place in a Cournot fashion and downstream firms have no bargaining power at all, they choose no differentiation. I also show the effects of an upstream and a downstream merger. When input suppliers merge to monopoly, the quality choice is not affected by the upstream market power and differentiation always emerges. When the downstream segment is shaped by a monopoly, goods become homogeneous unless input suppliers have weak bargaining power. If input prices are high enough before the downstream merger, a downstream monopoly leads to an increase in social welfare.

Suggested Citation

  • Borja Mesa Sánchez, 2010. "Endogenous quality choice under upstream market power," Working Papers. Serie AD 2010-32, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2010-32
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    Keywords

    vertical differentiation; endogenous quality choice; horizontal mergers;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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