Elimination Of Double Marginalization Research Articles

Double marginalization in the pricing of complements: The case of US freight railroads

AbstractMonopolists selling complementary products charge a higher price in a static equilibrium than a single (multiproduct) monopolist would, reducing both the industry profits and consumer surplus. Firms could instead reach a Pareto improvement by lowering prices to the single‐monopolist level. We analyze pricing data of railroad coal shipping in the United States. We compare a coal producer that needs to ship from A to C, with the route passing through B, in two cases: (1) the same railroad owning AB and BC and (2) different railroads owning AB and BC. We do not find that the price in case (2) is higher than the price in case (1), suggesting that the complementary monopolist pricing inefficiency is absent in this market. Our findings are robust to propensity score blocking, causal machine learning algorithms, and difference‐in‐differences analysis. Our results have implications for vertical mergers, tragedy of the anticommons, mergers of firms selling complements, elimination of double marginalization, and royalty stacking and patent thickets.

Optimal Decisions of Electric Vehicle Closed-Loop Supply Chain under Government Subsidy and Varied Consumers’ Green Awareness

The emerging operating mode of new automobile forces in the context of China brings up new problems for the development of the EV CLSC, which are the market position shift inside the loop and government policy and consumer awareness of changes outside it. Aiming at promoting the development of the EV CLSC, this study integrates the influence of internal and external factors, analyzes their joint impact on the performance of the EV CLSC, and explores the optimal CLSC structure. Specifically, this study develops five game theory models considering different CLSC structures and consumers’ green awareness under government subsidy and varied channel leaderships. Combining theoretical analysis with numerical simulation, the study reveals the performance of the EV CLSC and indicates the optimal CLSC decisions for different players. The result suggests that an EV manufacturer should develop an EV CLSC by itself considering the elimination of double marginalization. When a third-party player is incorporated, the EV manufacturer should undertake the collection effort by itself to optimize the benefit for both the EV manufacturer and the third-party player, especially considering the increasing green awareness of consumers. And a lift of each player’s channel power would always be a wise choice for each other. For the government which has the goals of promoting both the EV industry and the end-of-life treatment of obsolete EVs, a series of trade-offs including the CLSC structure and channel leadership should be considered prudently. This study contributes to the comprehensive understanding of the optimal decisions of the EV CLSC, and will benefit the development of the EV CLSC.

Vertical Disintegration: The Effect of Refiners’ Exit from Gasoline Retailing on Retail Gasoline Pricing

The net effect of vertical integration on consumer welfare depends on the magnitude of the price reductions resulting from the elimination of double marginalization at the integrated firm and the price increases resulting from higher input prices charged to unintegrated competitors. In this paper, we estimate both of these effects in the US gasoline industry by examining the change in relative retail gasoline prices following the vertical separation caused by refiners’ decision to exit gasoline retailing beginning in the mid-2000s. Using station-level price data from Florida and New Jersey, we find that double marginalization caused retail prices to increase by about 1.2 cents per gallon. Estimates of the effect of raising rivals’ costs, while sensitive to the choice of control group, are of a similar magnitude. On net, we find that the average retail price of gasoline was effectively unchanged as the result of vertical separation.

BUYER POWER, EXCLUSIVE CONTRACTS, AND VERTICAL MERGERS IN COMPETING SUPPLY CHAINS: IMPLICATIONS FOR COMPETITION LAW AND POLICY

This paper studies how the buyer power of downstream firms can affect the market outcomes in both upstream manufacturing and downstream retail markets. In a two-tier oligopoly, where upstream firms are locked in a pair-wise exclusive relationship with their downstream retailers, we study the choice of firms between vertical merger and Nash Bargaining with twopart tariff regimes. On working with three cases of no vertical merger, single chain vertical merger and double chain vertical merger we find that joint profits of upstream and downstream firms are lowest when both channels choose vertical integration as compared to Nash Bargaining regime. We also find that Vertical integration is welfare enhancing because retail price will be minimum as upstream and downstream firms behave as a single entity. Hence for both single and double chain mergers, elimination of double marginalization is procompetitive. These results have implications for the enforcement of competition (antitrust) law.

Doubling Back on Double Marginalization

“Double marginalization” and “Elimination of Double marginalization” are catch-phrases commonly used in the IO literature. In this article, I trace back the origin of the idea to Cournot (1838, Ch. IX) on complementary goods monopolies. Through the years Cournot’s contribution remained a reference but ended being viewed as a special case of the bilateral monopoly model. Yet, it is worth wondering why the most cited paper on this issue is nowadays (Spengler in J Polit Econ 58(4):347–352, 1950) which contains only an informal treatment of the question. In addition to retracing the origin of the idea, I emphasize the elegant proof of Cournot for the simultaneous game and extend it to the sequential game. I also show that prices are usually higher in the sequential game but that they could be lower if demand is very convex.

Vertical Mergers and Input Foreclosure Lessons from the AT&T/Time Warner Case

This article offers a practical guide to analyzing vertical mergers using the general approach to input foreclosure and raising rivals’ costs that is described in the 2020 Vertical Merger Guidelines that were issued by the U.S. Department of Justice and the Federal Trade Commission. The step-by-step analysis described here draws lessons from how that theory of harm played out in the lone vertical merger case that has been litigated by the antitrust agencies in recent decades: the 2018 challenge by the Department of Justice to the merger between AT&T and Time Warner. I testified in court as the DOJ’s economic expert in that case. I explain here how to quantify the increase in rivals’ costs and the elimination of double marginalization that are caused by a vertical merger and how to evaluate their net effect on downstream customers. I also explain how this economic analysis fits into the three-step burden-shifting approach that the courts apply to mergers under Section 7 of the Clayton Act. Based on my experience in the AT&T/Time Warner case, I identify a number of shortcomings of the 2020 Vertical Merger Guidelines.

Vertical Mergers and Input Foreclosure: Lessons from the AT&T/Time Warner Case

This article offers a practical guide to analyzing vertical mergers using the general approach to input foreclosure and raising rivals’ costs described in the 2020 Vertical Merger Guidelines issued by the Department of Justice and the Federal Trade Commission. The step-by-step analysis described here draws lessons from how that theory of harm played out in the lone vertical merger case litigated by the antitrust agencies in recent decades, namely the 2018 challenge by the Department of Justice to the merger between AT&T and Time Warner. I testified in court as the DOJ’s economic expert in that case, giving me a unique perspective. I explain here how to quantify the increase in rivals’ costs and the elimination of double marginalization caused by a vertical merger and how to evaluate their net effect on downstream customers. I also explain how this economic analysis fits into the three-step burden-shifting approach that the courts apply to mergers under Section 7 of the Clayton Act. Based on my experience in the AT&T/Time Warner case, I identify a number of shortcomings of the 2020 Vertical Merger Guidelines.

The Competitive Impact of Vertical Integration by Multiproduct Firms

We study the impact of vertical integration on pricing incentives in multiproduct industries. To do so, we exploit recent variation in vertical structure in the US carbonated-beverage industry. While the elimination of double marginalization with vertical integration is normally characterized as procompetitive, economic theory predicts that it may cause anticompetitive price increases in multiproduct industries. We indeed find that vertical integration causes price decreases in products with eliminated double margins but price increases in the other products sold by the integrated firm. These results provide new evidence of anticompetitive effects of vertical mergers. (JEL D22, D43, G34, L13, L22, L66)

Equilibrium Analysis of Vertical Mergers

Vertical mergers are known to potentially create an incentive for the merged firm to raise the price of inputs it supplies to its rivals (raising rivals’ cost [RRC]). At the same time, vertical mergers are known to create efficiencies in the form of elimination of double marginalization (EDM). Competitive effects of vertical mergers are evaluated as the net effect of RRC and EDM. Conventional antitrust techniques treat the two effects—RRC and EDM—as separable and analyze each in isolation before evaluating their net effect. We show that in an equilibrium treatment, RRC and EDM are not separable; instead, they are inseparably linked because the size of EDM is an important determinant of the strength of the RRC incentive. When the link between EDM and RRC is taken into account, predicted price effects of a vertical merger can turn out to be significantly different relative to those predicted by conventional techniques. Under certain commonly used assumptions, a vertical merger may even create an incentive for the merged firm to lower its rivals’ cost. The precise price effect depends on two things: the shape of demand and the bargaining power of the upstream input supplier in its price negotiations with downstream firms.

Vertical Disintegration: The Effect of Refiner Exit from Gasoline Retailing on Retail Gasoline Pricing

The net effect of vertical integration on consumer welfare depends on the magnitude of the price reductions resulting from the elimination of double marginalization at the integrated firm and the price increases resulting from higher input prices charged to un-integrated competitors. In this paper, we estimate both of these effects in the U.S. gasoline industry by examining the change in relative retail gasoline prices after refiners exited gasoline retailing beginning in the mid-2000s. Using station-level price data from Florida and New Jersey, we find that double marginalization caused retail prices to increase by about 1.2 cents-per-gallon. Our estimates of the raising rival’s cost effect, while sensitive to the choice of control group, are of a similar magnitude. On net, we find that the average retail price of gasoline was effectively unchanged as the result of vertical separation.

Vertical Integration between Hospitals and Insurers

The welfare effects of vertical integration are ambiguous. Cost efficiencies and the elimination of double marginalization may offset increases in market power and incentives to raise rivals' costs. To study the effects of vertical integration between insurers and hospitals, we develop a model of bargaining and competition. Integrated firms have incentives to increase hospital prices to rivals to steer demand to integrated partners. We estimate the model using administrative data on claims and plans from Chile, where vertically integrated hospitals account for half of all admissions. Our estimates imply that steering incentives are significant and that vertical integration decreases welfare.

Tying Noncompetitive Goods

Many of the classic tying cases involved tied products that were common staples such as button fasteners, canned ink, dry ice, or salt. These products were sold in competitive markets, presumably at prices very close to cost. For most of them the most likely explanations for the tie were quality control or price discrimination, both with competitively benign results in the great majority of situations. When the tied good is sold in a noncompetitive market, however, an additional consumer welfare enhancing result is likely to obtain – namely, the elimination of double marginalization, which occurs when separate sellers of complementary products each has market power. The double marginalization result occurs only when both products are sold at prices above the competitive level. It can apply in both the vertical context, such as when a monopoly manufacturer must distribute through a retailer market that is subject to monopoly, oligopoly or collusion, but it also occurs in situations involving complements, such as printers and ink cartridges, hospitals and physicians, or many medical devices that include both durable and reusable components. Indeed, the problem is generally more serious in the complementary situations, because often firms offering complementary products are not in a good position to negotiate with one another for a joint-maximizing output increase, while the participants in a vertical chain of distribution bargain with each other all the time. In cases where both tying and tied products are subject to some market power, the profit maximizing price of a seller who offers both products in a bundle is typically lower than the individual profit-maximizing prices of two sellers, each of which sells only one of the products. Outside of the franchise context, which often involves commodity tying, most ties today involve manufactured tied products subject to at least some product differentiation, and typically nontrivial fixed costs. In all such cases the double marginalization argument presumptively applies and suggest another reason why ties should not be condemned except after a full rule of reason analysis. The typical result of eliminating double marginalization is that output of both the tying and the tied good increase and consumers pay lower prices. The result is a welfare improvement under both the total welfare and consumer welfare tests for competitive harm.

Does Vertical Integration Decrease Prices? Evidence from the Paramount Antitrust Case of 1948

I empirically examine the impact of the 1948 Paramount antitrust case on ticket prices using a unique dataset collected from Variety magazine issues between 1945 and 1955. With information on prices, revenues, and theater ownership for an unbalanced panel of 393 theaters in 26 cities, I find that vertically integrated theaters charged lower prices and sold more admission tickets than nonintegrated theaters. I also find that the rate at which prices increased in theaters was slower while integrated than after vertical divestiture. These findings together with institutional details are consistent with the prediction that vertical integration lowers prices through the elimination of double marginalization. (JEL G34, K21, L11, L22, L42, L82)

Tacit Patent Pooling

We define tacit pooling as a non-contractual arrangement in which producers freely utilize one another's patented technologies without charging license fees or filing infringement claims. This differs greatly from the standard notion of (explicit) pooling considered in the literature, which typically involves holders who set license fees collectively in order to profit from the elimination of double marginalization. In particular, explicit pooling is intended to increase licensing revenues, while tacit pooling is intended to avoid licensing altogether. Tacit pooling is commonly profitable for small firms in innovative industries plagued by thicket problems, such as small software publishers. We show that tacit pooling may be a profitable cooperation strategy in a prisoner's dilemma game whose equilibrium involves aggressive cross-licensing in the shadow of litigation, as well as costly disguising of potential infringements. This practice is always socially desirable, as it reduces transaction and litigation costs, and it promotes idea sharing among inventors. We analyze how various phenomena may affect the scope and stability of tacit pooling. Large acquisitions may in principle be welfare enhancing if they serve to facilitate tacit pooling, but these efficiencies can be offset if firms regularly invest heavily in secondhand patents. The availability of injunctive relief as an infringement remedy will tend to forestall tacit pooling arrangements in concentrated markets, as its value as an exclusionary device will commonly outweigh the gains from tacit pooling, leading firms to prefer aggressive litigation strategies. The desire to facilitate tacit pooling may incentivize acquisition of patents that are ultimately never asserted, helping to explain the patent paradox, which questions why many firms invest heavily in patents that ostensibly yield negative returns.

Airport’s Profit Sharing: Effects on Investment Incentives, Competition and Social Welfare

The aim of this paper is to investigate the effects of airport’s profit sharing on the incentives to invest, market competition and social welfare. The analysis is developed under two frameworks, one with a single airport and one with two competing airports, and both with airline competition. We conclude that airport’s profit sharing may display the highest incentive to invest when compared to alternative vertical relations. Also, we found that airport’s profit sharing excludes the independent airline, as long as the profit airport participation is not below 60%. Moreover, airport’s profit sharing does not allow the elimination of double marginalization and thus the effects on social welfare are ambiguous.

Does Vertical Integration Decrease Prices? Evidence from Paramount Antitrust Case of 1948

I empirically examine the impact of the 1948 Paramount antitrust case on ticket prices using a unique data set collected from Variety magazine issues between 1945 and 1955. With weekly movie theater information on prices, revenues and theater ownership for an unbalanced panel of 393 theaters located in 26 different metropolitan areas, I find evidence consistent with Spengler’s (1950) prediction that vertical integration lowers prices through the elimination of double-marginalization. My results show that vertically integrated theaters charged lower prices and sold more admission tickets than nonvertically integrated theaters. I also find that the rate at which prices increased in theaters were slower before vertical separation than it was after separation. A back of the envelope calculation suggests that losses in consumer surplus due to the Supreme Court resolution and the corresponding sale of theater holdings by Paramount and seven other companies were sizable.

Effects of distribution channel structure in markets with vertically differentiated products

This study examines how the structure of distribution channels may influence firms’ quality and price strategies and how they may in turn affect consumer welfare. It treats product quality as a decision variable so that the degree of product substitution becomes endogenous rather than exogenous as in previous studies. We find that, with vertically differentiated firms, the changes in channel structure have asymmetric effects depending on whether they occur in the high-quality channel or in the low-quality channel. The product quality of the high-quality channel decreases when it decentralizes unilaterally. However, product quality of the low-quality channel would increase when it decentralizes. The high-quality manufacturer and its channel suffer more from decentralization in comparison with their low-quality counterparts, and the low-quality manufacturer actually receives greater profits when both channels are decentralized. An important driver behind these asymmetries is the interaction between firms’ pricing incentives in integrated versus decentralized channels and what consumer segments they serve. Our analysis indicates that decentralization may reduce consumer welfare, but decentralization in the high-quality channel hurts consumers more than that in the low-quality channel. Therefore in a competitive environment where firms make both quality and price decisions, channel integration would have significant welfare enhancement effects through the elimination of double marginalization, especially if it happens in the high-quality channel. Moreover, we demonstrate that once quality is endogenized, integration is the only equilibrium of channel structure choices. This suggests that the private incentives of firms may actually benefit consumers but do not have to be in line with the general preference of industry regulation for decentralization.