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Review of Industrial Organization

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17-02-2017

Some Simple Analytics of Vertically Linked Markets

Author: Joseph Farrell

Published in: Review of Industrial Organization | Issue 4/2017

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Abstract

A firm may have an incentive to encourage competition and/or efficiency in an “aftermarket” that is vertically linked to a “foremarket” in which it participates. I describe a strong form of this potential incentive, and then explore how it is weakened in plausible circumstances. Some applications to net neutrality are described.

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I believe that one could legitimately use more than one concept of price here, provided that one is consistent; but the perceived system price most directly drives demand.

Severin Borenstein has suggested a possible illustration: In airlines, the introduction of “premium economy” seating, or more generally the shifting around in relative amenities and terms that are offered by airlines to different groups of passengers, repeatedly changes the identity of “the marginal customer” (for any one airline, or, if it matters, for the industry).

Agarwal, S., Chomsisengphet, S., Mahoney, N., & Stroebel, J. (2015). Regulating consumer financial products: Evidence from credit cards. The Quarterly Journal of Economics, 130(1), 111–164.CrossRef

Borenstein, S., MacKie-Mason, J., & Netz, J. (2000). Exercising market power in proprietary aftermarkets. Journal of Economics and Management Strategy, 9, 157–188.CrossRef

Cabral, L. (2014). Aftermarket power and foremarket competition. International Journal of Industrial Organization, 35, 60–69.CrossRef

Carlton, D., & Waldman, M. (2010). Competition, monopoly, and aftermarkets. Journal of Law Economics and Organization, 26, 54–91.CrossRef

Coppi, L. (2007). Aftermarket monopolization: The emerging consensus in economics. Antitrust Bulletin, 52, 53–71.

Farrell, J. (2012). Can privacy be just another good? The Journal on Telecommunications and High-Technology Law, 10, 251–264.

Farrell, J., & Weiser, P. (2003). Modularity, vertical integration, and open access policies. Harvard Journal of Law and Technology, 17, 85–134.

O’Brien, D., & Smith, D. (2014). Privacy in online markets: A welfare analysis of demand rotations. Federal Trade Commission Bureau of Economics working paper no. 323.

Shapiro, C. (1995). Aftermarkets and consumer welfare: Making sense of Kodak. Antitrust Law Journal, 63, 483–511.

Spence, M. (1975). Monopoly, quality and regulation. Bell Journal of Economics, 6, 417–429.CrossRef

U.S. Department of Justice and Federal Trade Commission. (2010). Horizontal merger guidelines.

Veiga, A., & Weyl, G. (2016). Product design in selection markets. Quarterly Journal of Economics, 131, 1007–1056.CrossRef

Title: Some Simple Analytics of Vertically Linked Markets
Author: Joseph Farrell
Publication date: 17-02-2017
Publisher: Springer US
Published in: Review of Industrial Organization / Issue 4/2017
Print ISSN: 0889-938X
Electronic ISSN: 1573-7160
DOI: https://doi.org/10.1007/s11151-017-9571-2

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Other articles of this Issue 4/2017

Wither U.S. Net Neutrality Regulation?

The Digital Divide and Other Economic Considerations for Network Neutrality

Introduction to the RIO Special Issue on Net Neutrality

Avoiding the Pitfalls of Net Uniformity: Zero Rating and Nondiscrimination

The Evolution of “Competition”: Lessons for 21st Century Telecommunications Policy

Law, Social Welfare, and Net Neutrality

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