Chapter 13: Vertical Mergers in Markets with Network Effects
13. Vertical mergers in markets with network eﬀects Gerhard Clemenz INTRODUCTION This chapter investigates the impact of vertical mergers between producers and retailers on social welfare and consumer surplus if the goods under consideration display network eﬀects and are not compatible with each other. It is shown that vertical integration is indeed harmful for consumers because the integrated ﬁrm is able to exploit the network eﬀect in such a way that the other producer is eﬀectively kept out of the market and consumers have to pay higher retail prices. Formally we analyze a model with two producers, each of them producing a network good which is not compatible with the other good. Consumers buy one of the products from a retailer and enjoy utility from a network eﬀect which is increasing in the number of consumers who buy the same brand. There are two retailers who engage in spatial competition which is modeled in the fashion of Hotelling’s linear city model. We compare three diﬀerent market conﬁgurations. In the ﬁrst scenario all four ﬁrms are independent. There exist two types of equilibrium. In a symmetric non-standardization equilibrium both brands are sold and have equal market shares. In contrast to several models in the literature on network goods (for example Shy, 2001; Farrell and Saloner, 1992) such an equilibrium exists also if the network eﬀect dominates the traveling costs. In an asymmetric standardization equilibrium one brand captures the entire market. Due to spatial...
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