Some notes on informational coalition in a vertical market structure

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Acknowledgements

This paper is written by modifying my term paper for the course, Industrial Organization (Prof. Jose M. Plehn-Dujowich). I would like to thank Prof. Plehn-Dujowich. Of course, all errors and all immatureness are my own.

Notes

¹ Of course, one can assume some correlation ρ between two realizations of and (). At ρ − 1 S and P equilibria coincide in their economic outcome, and ρ = 0 is equivalent with the condition for stochastic independence in Assumption 2. Assuming that ρ ≠ 1 and ρ ≠ 0, does not change the results of Proposition 1. In addition, unlike in a horizontal structure, in a vertical structure the cost information in each stage (industry) is likely to be almost uncorrelated with each other, because the manufacturing technology in each stage is distinct in its type and nature. So we may assume ρ = 0 without loss of generality.

² This is a typical example of ‘double marginalization’ in a vertical structure, as explained by Tirole (1993).

³ The point that the mean-preserving price fluctuation might improve the expected consumer surplus was also discussed in Eco 795 (Topics in International Economics: Prof. W. Chang) with a reference paper, to which I am indebted a lot.

⁴ For the notion of ‘fallibility’, see Sah and Stiglitz (1985).

⁵ For example, the asymmetric information (moral hazard or adverse selection, etc.) is a typical example of the externality of information in the sense that the information remains not to be traded with a price, therefore remains in asymmetry within the economy. On the other hand, ‘learning by doing’ may be categorized into the endogeneity of information in the sense that the created information is immediately incorporated and embodied into a new production process.

⁶ Intellectual properties including patents or know-how are supposed, in general, to have a positive productivity effect, so that they might be bargained with a positive price.