Working Paper: CEPR ID: DP7948
Authors: Frago Kourandi; Nikolaos Vettas
Abstract: We set-up a linear city model with duopoly upstream and downstream. Consumers have a transportation cost when buying from a retailer, and retailers have a transportation cost when buying from a wholesaler. We characterize the equilibria in a five-stage game where location and pricing decisions (wholesale and retail) by all four firms are endogenous. The usual demand and price competition effects are modified and an additional strategic effect emerges, since the retailers' marginal costs become endogenous. Firms tend to locate farther away from the market center relative to the vertically integration case. When the wholesalers choose locations before the retailers, each wholesaler locates closer to the market center relative to the retailer locations, and relative to when the wholesalers cannot move first. Each wholesaler does this to strengthen the strategic position of its retailer by credibly pulling him towards the market center. As a result, the intensity of competition is higher and industry profit is lower when upstream locations are chosen before downstream locations. Variations of the model and welfare analysis are provided.
Keywords: linear city; locations; spatial differentiation; strategic commitment; vertical contracting
JEL Codes: L13; R32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| order of location choice (R30) | wholesalers' location (L81) |
| wholesalers' location (L81) | retailers' location (R32) |
| wholesalers' location (L81) | final consumer prices (P22) |
| retailers' location (R32) | final consumer prices (P22) |
| lack of vertical integration (L22) | final consumer prices (P22) |
| order of location choice (R30) | competition (L13) |
| competition (L13) | industry profits (D33) |
| lack of vertical integration (L22) | double marginalization (J79) |