Profitable Double Marginalization

Abstract

When successive monopolies transact through noncooperative linear pricing, the resulting double markup decreases their joint profits relative to vertical integration. However, if there are downstream rivals (which are not double marginalized), the same noncooperative interaction often inadvertently raises their joint profits. Profit effects depend on how the well-understood harm from misaligned interests compares to the value of the resulting strategic effect. When profitable, vertical noncooperation incidentally approximates strategic delegation a la Bonanno & Vickers (1988), but avoids its credibility problem, suggesting an inability to bargain may be indirectly beneficial. The conjectural consistency concept helps to explain the disparate profit effects, and to synthesize the literature on strategic delegation and vertical control. The optimal way to distort a downstream firm's behavior is always to make it behave as if it has a conjecture, no matter the distortion mechanism. If upstream competitors do this in parallel, they induce a consistent conjectures equilibrium (CCE) -- or else a close analogue -- evincing a strong link between ordinary Nash games and the CCE.