Endogenous quality choice under upstream market power

Borja Mesa Sánchez ()
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Borja Mesa Sánchez: Dpto. Fundamentos del Análisis Económico
Authors registered in the RePEc Author Service: Borja Mesa-Sánchez

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: This paper analyzes how the existence of upstream market power affects endogenous quality choice in a setting where two downstream firms are locked in a bilateral monopoly with their own input suppliers. The main result is that the degree of product differentiation is reduced as upstream market power increases. This holds under Bertrand and Cournot competition, although differentiation is higher in the former. If competition takes place in a Cournot fashion and downstream firms have no bargaining power at all, they choose no differentiation. I also show the effects of an upstream and a downstream merger. When input suppliers merge to monopoly, the quality choice is not affected by the upstream market power and differentiation always emerges. When the downstream segment is shaped by a monopoly, goods become homogeneous unless input suppliers have weak bargaining power. If input prices are high enough before the downstream merger, a downstream monopoly leads to an increase in social welfare.

Keywords: vertical differentiation; endogenous quality choice; horizontal mergers (search for similar items in EconPapers)
JEL-codes: L11 L13 L15 L41 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2010-11
New Economics Papers: this item is included in nep-com and nep-ind
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Published by Ivie

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http://www.ivie.es/downloads/docs/wpasad/wpasad-2010-32.pdf Fisrt version / Primera version, 2010 (application/pdf)

Related works:
Journal Article: Endogenous quality choice under upstream market power (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2010-32

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