Abstract
Abstract This paper extends the seminal model of vertical product differentiation by Ronnen (1991) to a two-tier supply chain. While Ronnen considers the duopoly case, we add a vertical structure such that each downstream firm procures an input from a monopolistic upstream supplier. While simultaneous up- and downstream regulation in the form of a minimum quality standard restores Ronnen’s findings, if only one firm is regulated in the vertical chain, a free-rider effect results: all the bargaining power is given to the non-regulated member of the chain, which uses it to free-ride on the pressure exerted by the regulator onto the other member.
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