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On the benefits of contractual inefficiency in quality-differentiated markets

Emanuele Bacchiega () and Olivier Bonroy ()

Working Papers from Grenoble Applied Economics Laboratory (GAEL)

Abstract: Contractual inefficiencies within supply chains increase an input price above its marginal cost, therefore they are considered detrimental to consumer surplus. We argue that such inefficiencies may be beneficial to consumers in quality-differentiated markets. Indeed, enhancing contractual efficiency in high-quality supply chains may adversely affect the market structure by driving low-quality vertical chains out of the market and, consequently, reduce consumer surplus. Due to the finiteness property (counter-)integration in the low-quality channel does not allow this channel to be in business. Our result holds irrespective of whether the contractual inefficiencies originate from the double marginalization or the "commitment effect".

Keywords: VERTICAL PRODUCT DIFFERENTIATION; VERTICAL INTEGRATION; LINEAR TARIFF; TWO-PART TARIFF; CONSUMER SURPLUS (search for similar items in EconPapers)
JEL-codes: L13 L22 L4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-mkt
Date: 2014
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Related works:
Journal Article: On the benefits of contractual inefficiency in quality-differentiated markets (2015) Downloads
Working Paper: On the benefits of contractual inefficiency in quality-differentiated markets (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:gbl:wpaper:2014-06

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