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No. 421: Product Differentiation in Successive Vertical Oligopolies

Paul Belleflamme , Queen Mary, University of London
Eric Toulemonde , University of Namur

October 1, 2000

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Abstract

This is a successive oligopoly model with two brands. Each downstream firm chooses one brand to sell on a final market. The upstream firms specialize in the production of one input specifically designed for the production of one brand, but they also produce the input for the other brand at an extra cost. We show that when more downstream firms choose one brand, more upstream firms will specialize in the input specific to that brand, and vice versa. Hence, multiple equilibria are possible and the softening effect of brand differentiation on competition might not be strong enough to induce maximal differentiation. The existence of equilibria and their welfare performance are also examined.

J.E.L classification codes: L11, L13, L23

Keywords:Product differentiation, Vertical relationships, Oligopoly

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