Differentiated duopoly under vertical relationships with communication costs

Arghya Ghosh () and Hodaka Morita ()

Industrial Organization from EconWPA

Abstract: Platform sharing across manufacturers has recently become common practice in the automobile industry. Its important objective is to reduce procurement costs by taking advantage of the commonality of components, but this often reduces the degree of product differentiation. We investigate this trade-off through analyzing a model that incorporates manufacturer-supplier relationships with communication costs into a standard differentiated duopoly model, and find an interesting inverse relationship between the advantage of platform sharing and the costs for manufacturers to communicate with their potential suppliers. The result suggests that the information-technology revolution could be a reason for the recent prevalence of platform sharing in the automobile industry, and predicts that similar phenomena would prevail in various other industries as the IT revolution makes further progress. We then consider an extension of our model that incorporates an option for the manufacturers to jointly establish a B2B electronic marketplace in order to reduce their communication costs, and explore its welfare implications. Although the joint establishment of an e-marketplace could be viewed as an anticompetitive activity, we find that in our framework it increases welfare.

Keywords: Communication cost; differentiated duopoly; electronic commerce; electronic marketplace; manufacturer-supplier relationships; platform sharing; product differentiation (search for similar items in EconPapers)
JEL-codes: L14 L22 L40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 2002-08-08
Note: Type of Document - pdf; prepared on IBM PC; to print on HP;
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpio:0207008

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