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Vertical integration of successive monopolists: a classroom experiment


Badasyan, Narine; Goeree, Jacob K; Hartmann, Monica; Holt, Charles A; Morgan, John; Rosenblat, Tanya; Servatka, Maros; Yandell, Dirk (2009). Vertical integration of successive monopolists: a classroom experiment. Perspectives on Economic Education Research, 5(1):61-77.

Abstract

This classroom experiment introduces students to the concept of double marginalization, i.e., the exercise of market power at successive vertical layers in a supply chain. By taking on roles of firms, students determine how the mark-ups are set at each successive production stage. They learn that final retail prices tend to be higher than if the firms were vertically integrated. Students compare the welfare implications of two potential solutions to the double marginalization problem: acquisition and franchise fees. The experiment also can stimulate a discussion of two-part tariffs, transfer pricing, contracting, and the Coase theorem.

Abstract

This classroom experiment introduces students to the concept of double marginalization, i.e., the exercise of market power at successive vertical layers in a supply chain. By taking on roles of firms, students determine how the mark-ups are set at each successive production stage. They learn that final retail prices tend to be higher than if the firms were vertically integrated. Students compare the welfare implications of two potential solutions to the double marginalization problem: acquisition and franchise fees. The experiment also can stimulate a discussion of two-part tariffs, transfer pricing, contracting, and the Coase theorem.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2009
Deposited On:22 Feb 2010 09:12
Last Modified:07 Dec 2017 01:23
Publisher:Idaho State University
ISSN:1947-8097
Official URL:http://www.isu.edu/peer/yandell.shtml
Related URLs:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1352090

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