Monday, October 28, 2019
John E. Kwoka, Jr., Northeastern University - Department of Economics and Margaret Slade, University of British Columbia (UBC) offer Second Thoughts on Double Marginalization.
ABSTRACT: A longstanding economic proposition predicts that vertical integration between companies with market power can benefit both consumers and firms by eliminating the “double marginalization” that characterizes pricing by the firms separately. Too often, however, this proposition is cited without sufficient attention to its underlying assumptions, leading to the possibility of its misuse in antitrust and regulatory proceedings involving vertical integration. This note outlines the strong assumptions of the basic model, explains how the conclusions differ when those assumptions do not hold, and analyzes certain unique settings that require special analysis. It cautions that policy should pay closer attention to traditional supply and organization efficiencies of vertical integration rather than the double marginalization scenario.