Can Vertical Separation Reduce Non-Price Discrimination and Increase Welfare?

Duarte Brito and João Vareda ()
Authors registered in the RePEc Author Service: Pedro Pereira

CEFAGE-UE Working Papers from University of Evora, CEFAGE-UE (Portugal)

Abstract: We investigate if vertical separation reduces non-price discrimination and increases welfare. Consider an industry consisting of a vertically integrated firm and an independent retailer, which requires access to the vertically integrated firm's wholesaler services. The wholesaler can degrade the quality of input it supplies to either of the retailers. Discrimination occurs if one of the retailers is supplied an input of lower quality than its rival. We show that separation of the vertically integrated firm reduces discrimination against the independent retailer, although it does not guarantee no-discrimination. Furthermore, with separation, the wholesaler may discriminate against the vertically integrated firm's retailer. Vertical separation impacts social welfare through two e¤ects. First, through the double-marginalization effect, which is negative. Second, through the quality degradation effect, which can be positive or negative. Hence, the net welfare impact of vertical separation is negative or potentially ambiguous.

Keywords: Vertigal integration; Vertical separation; Non-price discrimination. (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011
New Economics Papers: this item is included in nep-com, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:cfe:wpcefa:2011_06

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