Market Power in Vertically Related Markets

Our project aims at extending the industrial organization research on market power in vertical relations. We focus on specific areas of vertical relationships which are also high on the agenda of contemporary competition policy; in particular, vertical restraints, buyer power, one-stop shopping behavior inducing complementarities in consumer markets as well as problems of product quality and product variety. So far, all participating researchers have been working on different aspects of market power and vertical relations. By this research proposal, we bring together all our expertise and intend to unify our diverse efforts into a focused research group. Our research undertaking increases the interaction between the participants in a structured way, and therefore avoids duplication of research efforts and opens the unique opportunity to achieve synergies so as to spur industrial organization research on vertical relations. Our research objectives are the following.

First, our project deals with the mode of competition in vertical structures. More specifically, we study the role of price discrimination, RPM, and collusion.

Second, we aim to analyze the sources and implications of buyer power. We focus on the determinants of buyer power where we expect to qualify and extend existing results concerning the relationship between buyers' size and bargaining power. Moreover, we target the interdependency of buyer power and product quality/variety from a consumers' perspective. By this, we confront our theoretical results with competition policy practices concerning the assessment of retail mergers, the formation of buyer groups, and the likely impact of buyer power on overall product quality.

Third, we deal with the implications which complementarities in downstream markets have vertical structures in terms of integration and location. We investigate vertical integration with complementary goods and consider incentives for upstream mergers. We will also examine the choice of location and product lines by downstream retailers in one-stop shopping markets. One more general issue explored in this work package is to understand the impact of one-stop shopping markets on the bargaining positions of the upstream and downstream negotiators.

Fourth, our aim is to analyze the interdependency between reputation mechanisms and vertical relations when consumers are imperfectly informed about product quality. We will analyze the relationships between reputational effects and the assortment decisions of retailers. We also wantto investigate certification decisions in vertical relations. Our main research questions concern the efficient allocation of the right to ask for certification, the impact of bilateral contracting, and how the market structure for certification services affects certification outcomes. Finally, we will analyze umbrella branding in dynamic environments with adverse selection.

Bringing together the results from those different areas we will provide a deeper and better understanding of vertical relationships and related issues. Our results will, therefore, contribute to the current debates in competition policy circles that center around market power in vertically related markets.