Abstract
A firm may have an incentive to encourage competition and/or efficiency in an “aftermarket” that is vertically linked to a “foremarket” in which it participates. I describe a strong form of this potential incentive, and then explore how it is weakened in plausible circumstances. Some applications to net neutrality are described.
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Notes
I believe that one could legitimately use more than one concept of price here, provided that one is consistent; but the perceived system price most directly drives demand.
Severin Borenstein has suggested a possible illustration: In airlines, the introduction of “premium economy” seating, or more generally the shifting around in relative amenities and terms that are offered by airlines to different groups of passengers, repeatedly changes the identity of “the marginal customer” (for any one airline, or, if it matters, for the industry).
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Farrell, J. Some Simple Analytics of Vertically Linked Markets. Rev Ind Organ 50, 431–440 (2017). https://doi.org/10.1007/s11151-017-9571-2
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DOI: https://doi.org/10.1007/s11151-017-9571-2