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appropriately manage their own health, the large number Double Marginalization Chapter 8 128 Smoking Privileges of mentally ill individuals within the remaining population of smokers has cast doubt on smokers at a whole. In recent years, policymakers have not nec- essarily made a distinction between mentally ill smokers and those without a mental illness— especially because nicotine dependence (or the new diagnosis of tobacco use disorder) is itself a diagnosis. Smokers themselves are beginning to be seen as mentally ill. Who else but someone with a mental problem would

The Promise and Pitfalls of Restructuring Network Industries Stefan Buehler University of Zurich and University of St. Gallen Abstract. This paper examines the competitive effects of reorganizing a network industry’s vertical structure. In this industry, an upstream monopolist operates a network used as an input to produce horizontally differentiated final products that are imperfect substitutes. Three potential pitfalls of restructuring integrated network industries are analyzed: (i) double marginalization, (ii) underinvestment and (iii) vertical foreclosure

not to integrate or specialize depends on the trade-off between “escaping from” the double marginalization problem or the gain from specializing in the production stage in which the firm is more efficient. We show (using simulations) that more firms choose to be vertically integrated as the valuation of the final product or the number of consumers increases, unless the number of firms increases proportionately. KEYWORDS: Vertical integration, vertical equilibrium, industry growth, successive Cournot oligopoly, double marginalization effect. ∗Ivan Dufeu Normandy

supplier from joint-profit maximization even when the dominant supplier can adopt two-part tariffs. They then show that market-share contracts dampen retailers’ competition when selling a rival supplier’s goods, and that the dominant supplier can fulfill joint-profit maximization. Implementation of the contracts reduces horizontal externalities that are socially desirable, and hence reduces social welfare. Instead of horizontal externalities, this paper focuses on vertical externalities , recognized as double-marginalization problems. In a real business situation, quite

distributors may actually supply more promotional services than integrated distributors. KEYWORDS: service provision, independent distributors, vertical integration, double marginal- ization ∗The material in this paper is partly taken from the now defunct working paper “Successive Mo- nopolies with Endogenous Quality.” The views expressed in this article represent those of the author only, and do not necessarily reflect the opinions of other CRA staff or of CRA’s clients. 1 Introduction In antitrust practice, it is often argued that independent distributors of goods have an

captures the complementary goods flavor of extended warranty. We then investigate the impact of different distributional arrange- ments commonly observed in the marketplace for market outcomes and manufacturer profitability. We show that two key forces drive the results-the complementary goods effect and the double marginalization effect. Different channel arrangements for marketing of extended warranty cause these effects occur at different levels within a distribution channel and these are shown to have significant implications for the optimal warranty policy. KEYWORDS

of the Cobb-Douglas type. We stress the differences between the conclusions obtained under this assumption and those resulting from the traditional literature in which output firms use a constant returns technology. It is shown that when firms use a decreasing returns technology, (i) the profit of a downstream firm can decrease when the upstream market is more competitive; (ii) the input price does not tend to the corresponding marginal cost when the number of firms in both markets tends to infinite; and (iii) double marginalization is lower. Finally, the effects

the pool are perfect complements, a pool should be viewed benignly. The insight rests upon applying Cournot’s ( 1838 ) analysis of two monopolies providing perfectly complementary inputs to a downstream producer, in which neither of the upstream monopolists incorporates the negative externality that their pricing decision has on the other. 3 The implied (horizontal) double marginalization then results in lower producer and consumer surplus. The analysis was further refined in a general model by Lerner and Tirole (2004) , who also conclude that the more

, through the double- marginalization effect, which is negative. Second, through the quality degradation effect, which can be positive or negative. Hence, the net welfare impact of vertical separation is negative or potentially ambiguous. KEYWORDS: vertical integration, vertical separation, non-price discrimination ∗We thank the editor, three anonymous referees, M. Armstrong, D.-S. Jeon, M. Peitz, and T. Val- letti for useful comments. The opinions expressed in this article reflect only the authors’ views, and in no way bind the institutions to which they are affiliated

common supplier, leading to an increase in the common supplier’s input price due to the elimination of the double marginalization. Moreover, downstream firms that require a smaller quantity of inputs from the common supplier, for in- stance, those with efficient production technology or smaller downstream demand, are more likely to vertically integrate because vertical integration yields a smaller increase in input price. Thus, the cause of firm-size heterogeneity is important to consider when investigating the relationship between firm size and the tendency to