DP15849 On double marginalization and vertical integration
|Author(s):||Philippe Choné, Laurent Linnemer, Thibaud Vergé|
|Publication Date:||February 2021|
|Keyword(s):||Asymmetric information, Bargaining, Double marginalization, Optimal procurement mechanism, Vertical merger|
|JEL(s):||D4, D8, L1, L4|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15849|
Asymmetric information in procurement entails double marginalization. The phenomenon is most severe when the buyer has all the bargaining power at the production stage, while it vanishes when the buyer and suppliers' weights are balanced. Vertical integration eliminates double marginalization and reduces the likelihood that the buyer purchases from independent suppliers. Conditional on market foreclosure, the probability that final consumers are harmed is positive only if the buyer has more bargaining power when selecting suppliers than when negotiating over prices and quantities. Otherwise, the buyer's and consumers' interests are aligned.