Risk Aversion and Double Marginalization

Soheil Ghili () and Matthew Schmitt
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Soheil Ghili: Cowles Foundation, Yale University, https://som.yale.edu/faculty/soheil-ghili
Matthew Schmitt: UCLA

No 2144, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: In vertical markets, eliminating double marginalization with a two-part tariff may not be possible due to downstream firms' risk aversion. When demand is uncertain, contracts with large fixed fees expose the downstream rm to more risk than contracts that are more reliant on variable fees. In equilibrium, contracts may thus rely on variable fees, giving rise to double marginalization. Counterintuitively, we show that increased demand risk or risk aversion can actually mitigate double marginalization. We also characterize several sufficient conditions under which increased risk or risk aversion does exacerbate double marginalization. We conclude with an application to merger analysis.

Keywords: Risk Aversion; Double Marginalization; Vertical Markets (search for similar items in EconPapers)
Pages: 46 pages
Date: 2018-08
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
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