Vertical Integration of Successive Monopolists: A Classroom Experiment

Narine Badasyan, Jacob K. Goeree, Monica Hartmann, Charles Holt, John Morgan, Tanya Rosenblat, Maros Servatka, Dirk Yandell
    This classroom experiment introduces students to the concept of double marginalization, i.e., the exercise of market power at successive vertical layers in a supply chain. By taking on roles of firms, students determine how the mark-ups are set at each successive production stage. They learn that final retail prices tend to be higher than if the firms were vertically integrated. Students compare the welfare implications of two potential solutions to the double marginalization problem: acquisition and franchise fees. The experiment also can stimulate a discussion of two-part tariffs, transfer pricing, contracting, and the Coase theorem.