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Vertical separation with location–price competition

Youping Li () and Jie Shuai ()
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Jie Shuai: Zhongnan University of Economics and Law

Journal of Economics, 2017, vol. 121, issue 3, 255-266

Abstract: Abstract While the literature has generally found that vertical separation helps buffer competition and harm consumers in a duopolistic market, we find the exact opposite. To induce the retailers to locate closer to consumers and earn a larger market share, the manufacturers set wholesale prices below marginal cost. This market share effect dominates the previously focused coordination effect under which a higher wholesale price helps coordinate the retailers’ pricing decisions. For each manufacturer, vertical separation is a dominant strategy so the endogenous determination of vertical separation versus vertical integration is a prisoner’s dilemma game.

Keywords: Vertical separation; Vertical integration; Location–price competition (search for similar items in EconPapers)
JEL-codes: L1 R3 D4 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:kap:jeczfn:v:121:y:2017:i:3:d:10.1007_s00712-017-0533-9