Vertical Separation

Giacomo Bonanno () and John Vickers

Journal of Industrial Economics, 1988, vol. 36, issue 3, 257-65

Abstract: A simple duopoly model is used to show the advantage to a manufacturer of se lling his product through an independent retailer (vertical separatio n) rather than directly to consumers (vertical integration). Vertical separation is profitable insofar as it induces more friendly behavio r from the rival manufacturer. The authors consider the case where fr anchise fees can be used to extract retailers' surplus. They show tha t vertical separation is in the collective, as well as individual, in terest of manufacturers, and hence facilitates some collusion in the simple setting that they examine. Copyright 1988 by Blackwell Publishing Ltd.

Date: 1988
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