DP15849 Double marginalization and vertical integration

Author(s): Philippe Choné, Laurent Linnemer, Thibaud Vergé
Publication Date: February 2021
Date Revised: July 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.