“Pricing with markups under horizontal and vertical competition”
Coauthor(s): José Correa, Roger Lederman.
Classical models of competition have focused predominantly on markets of a single good where producers of substitutes, either perfect or imperfect, compete horizontally for the same pool of customers. Nevertheless, in some industries competition among customers has a significant combinatorial component in which producers whose goods may be purchased in combination compete vertically. We study a framework where each producers chooses a price schedule, having in mind both the actions of vertical and horizontal competitors. Each producer sets its pricing schedule according to a price function that is specified as a constant percentage markup over linear per-unit production costs. Afterwards, consumers choose a bundle composed of products given by any path of a series-parallel network. Producers located on parallel links compete horizontally, while connections in series represent vertical relationships. Our model allows for many infinitesimal customers, or a monopsony where a single buyer purchases components from multiple producers. In the latter setting, price schedules can be cast as contracts that depend on quantities. Examples of industries resembling this structure include those where a physical or geographic network is explicitly present, as in the airline industry, as well as those where a network structure is defined implicitly by the available bundles. We characterize equilibria of this two-stage game and study the efficiency resulting from the competitive structure of the market, specially focusing on the price distortions introduced by the strategic behavior of the producers. Finally, we use this model to study sensitivity questions and the effect of horizontal and vertical mergers.
Source: Proceedings of the INFORMS Manufacturing & Service Operations Management Society Annual Conference
Correa, José, Roger Lederman, and Nicolás Stier-Moses. "Pricing with markups under horizontal and vertical competition." In Proceedings of the INFORMS Manufacturing & Service Operations Management Society Annual Conference. Linthicum, MD: INFORMS, June 2010.
Place: Linthicum, MD