Welfare-improving vertical separation with network externality

Kangsik Choi and DongJoon Lee

Economics Letters, 2017, vol. 151, issue C, 115-118

Abstract: Considering the interplay between network externalities and the degree of product substitutability in a vertical structure, we compare the outcomes of vertical integration and vertical separation. In contrast to previous results, we show that when both products are sufficiently close substitutes, there is a threshold level of the network externality parameter, beyond which vertical separation is more efficient than vertical integration. This is due to the internalization of the network externality by a multiproduct monopolist, which, in the balance between the extensive and intensive margin, leads to higher output prices.

Keywords: Double-margin distortion; Product differentiation; Network externalities; Vertical separation; Vertical integration (search for similar items in EconPapers)
JEL-codes: D43 L13 M21 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:151:y:2017:i:c:p:115-118

DOI: 10.1016/j.econlet.2016.12.024

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