UW-Madison UW-Madison

Staff Paper No. 535 - Abstract

On Pricing and Vertical Organization of Differentiated Products

Guanming Shi [gshi@wisc.edu]
Jean-Paul Chavas [jchavas@wisc.edu]

Staff Paper No. 535, October 2010, 34p.


This paper investigates differentiated product pricing and the effects of vertical organization under imperfect competition. We use a Cournot model to examine the relationship between price margins and market concentrations in a vertical sector involving multi-product firms producing differentiated products. The analysis relies on vertical measures of concentration (termed VHHI) to study how the exercise of market power varies with substitution/complementarity relationships among products and vertical structures. This approach is used to analyze the US soybean seed pricing under two vertical structures: vertical integration and licensing. We find evidence that vertical organization has significant effects on soybean seed prices. These effects vary depending on the institutional setup. The empirical evidence indicates how complementarity can mitigate price enhancements associated with market concentration.
Last updated on Tue, Oct 12, 2010 4:00pm