Double marginalization

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As double marginalization (German: Doppelte Marginalisierung ) one describes the double price surcharge, which is to be found for goods that are manufactured in a multi-stage production process, such as raw material extraction, further processing and sale. Are the different stages of production operated by different companies and have this market power , for example in the form of a monopoly, then there is a new surcharge at each level. This double markup means that the end product is priced higher than it would be if a single company were in control of the entire production process. A chain of monopolies therefore causes prices that are even higher than the monopoly price of a vertically integrated company.

cause and effect

The cause of the price increase through double marginalization is the fact that the second monopolist only takes into account the negative effect of a price increase on his own profit when choosing a price, which is caused by a reduction in the sales volume. The negative externality on the first monopoly is not taken into account , because an increase in the total price leads to a decrease in the profit of the first company via the decrease in demand.

As a result, double marginalization must be assessed as clearly negative from a welfare point of view. Compared to a simple monopoly, the double price premium means that the total profit of the company is lower, the consumers have to pay a higher price and a smaller amount is consumed. All social groups are therefore strictly worse off.

Problem solving

There are numerous mechanisms to prevent or at least limit double marginalization . These include the following, among others.

  • Vertical integration : A merger of the company concerned ensures that the price setting is chosen from the joint perspective of the companies. The equivalent of this is a cartel run by the company concerned.
  • Franchise fee : The first company sells the right to sell its products to the second through a one-off price, the so-called franchise fee, which is independent of the amount sold. In addition, a price is calculated for each item sold. If this unit price is chosen so that it corresponds exactly to the marginal costs of production, it is optimal for the second company to choose the monopoly price for the end product. The first company here only makes profits through the franchise fee.
  • Non-linear pricing : The first company does not require a quantity-independent price per piece, but makes the unit price dependent on the total quantity sold. If the discount scheme is optimally selected, it corresponds exactly to the franchise solution.
  • Price fixing of the second hand ( resale price maintenance ): Here the first company prescribes the second the selling price of the final product.
  • Competition : If a manufacturer sells its products through competing dealers, competition among them ensures that the second markup is reduced.

Note that the above mechanisms only solve the problem of double marginalization . From the point of view of the general welfare, however, the problem of monopoly pricing remains. Furthermore, it should be pointed out that some mechanisms, such as a merger or cartel of companies, should be viewed critically in terms of competition policy in horizontal company relationships . However, in the vertical relationships discussed here , they have the advantage of avoiding the double markup. A solution that is viable under antitrust law can be resale price maintenance in the form of maximum price maintenance .

literature

The double markup phenomenon was anticipated as early as the 19th century by the French mathematician Augustin Cournot (1838). A first complete analysis can be found in Joseph Spengler (1950). Massimo Motta (2004) contains an understandable discussion of the subject.

  • Cournot, Augustin (1838). Recherches sur les Principes Mathématiques de la Théorie des Richesses , English edition: Research into the Mathematical Principles of the Theory of Wealth, Edited by N. Bacon, New York: MacMillan, 1897
  • Spengler, Joseph J. (1950). “Vertical Integration and Antitrust Policy”, Journal of Political Economy 58, 347–352
  • Motta, Massimo (2004). Competition Policy , Cambridge University Press