Market Power in Vertically Related Markets

Motivation

The classical view of producers selling directly to final consumers is the exception rather than the rule in modern economies. In most markets, producers and consumers interact with each other through retailers and other intermediaries. The typical production structure is, therefore, one of vertical chains, where both sellers and buyers have some degree of market power.


Objectives

The goal of our research project is to gain a deeper understanding on how an explicit account of the vertically separated structure of value chains affects market performance. We focus on the effect of imperfect competition in vertical chains. In particular, we ask how the balance of market power within the vertical structure affects economic efficiency in general and prices, quality, and the product variety of products in particular. Ultimately, ur proposed research on vertical chains is meant to lead to robust guidelines for policy makers in the arena of modern competition policy.

Although some important work on vertical chains has been done, there are many open questions, especially with regard to the policy implications of market power in vertical structures. At present the participating investigators are already working independently on different issues of vertical chains. This research proposal unites and unifies these diverse efforts into a focused research group. Our group will increase the interaction between the participants, avoid duplication of research efforts, and benefit from complementarities in order to advance research on vertical production chains. 


Work Packages

The overall project is structured in four modular work packages. In the first work package we deal with the mode of competition in vertical structures, where we focus on the role of price discrimination, resale price maintenance, and collusion. Work package 2 focuses on buyer power; in particular, the determinants of buyer power and its effects on investment incentives and product quality outcomes. In work package 3 we consider complementarities (provoked by one-stop shopping preferences) in the production chain and how they affect integration incentives and location choice. Finally, in work package 4, we analyze the issue of consumers' imperfect quality information on the organization of vertical chains where we focus on issues of certification and branding of products.