Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society

• #### DongJoon Lee   (Osaka Sangyo University)

Abstract

This paper examines the interplay between the strength of network externalities with both degrees of compatibility and product substitutability in a vertical structure. As alternative solutions to double marginalization, we compare the efficiency between integration case and vertical separation in centralized Nash bargaining with a two-part tariff under Cournot and Bertrand competition. In contrast to conventional wisdom, the equivalence between vertical separation under a two-part tariff and vertical integration never holds in network market with compatibility. Consequently, we show that regardless of the strength of network externalities with both degrees of compatibility and product substitutability, industrial profits, social welfare and consumer surplus are always higher under vertical separation in centralized Nash argaining than under integration case. Thus, under Cournot and Bertrand competition, double marginalization is necessary to implement the efficient outcomes, except for the case of full compatibility.

Keywords
Network Externalities, Compatibility, Two-part Tariff, Integration

JEL classification codes
D43, L13, L14