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We analyze the competitive effects of backward vertical integration when firms exert market power upstream and compete in quantities downstream. Contrasting with previous literature, a small degree of vertical integration is always procompetitive because efficiency gains dominate foreclosure effects, and vertical integration even to full foreclosure can be procompetitive. Interestingly, vertical integration is more likely to be procompetitive if the industry is otherwise more concentrated. Extensions analyze welfare effects of integration and the incentives to integrate. Our analysis suggests that antitrust authorities should be wary of vertical integration when the integrating firm faces many competitors and should be permissive otherwise.

Mechanisms according to which private intermediaries or governments charge transaction fees or indirect taxes are prevalent in practice. We consider a setup with multiple buyers and sellers and two-sided independent private information about valuations. We show that any weighted average of revenue and social welfare can be maximized through appropriately chosen transaction fees and that in increasingly thin markets such optimal fees converge to linear fees. Moreover, fees decrease with competition (or the weight on welfare) and the elasticity of supply but decrease with the elasticity of demand. Our theoretical predictions fit empirical observations in several industries with intermediaries.

Mechanisms according to which private intermediaries or governments charge transaction fees or indirect taxes are prevalent in practice. We consider a setup with multiple buyers and sellers and two-sided independent private information about valuations. We show that any weighted average of revenue and social welfare can be maximized through appropriately chosen transaction fees and that in increasingly thin markets such optimal fees converge to linear fees. Moreover, fees decrease with competition (or the weight on welfare) and the elasticity of supply but decrease with the elasticity of demand. Our theoretical predictions fit empirical observations in several industries with intermediaries.

We study location games where market entry is costly and occurs sequentially, and where consumers are nonuniformly distributed over the unit interval. We show that for certain classes of densities, including monotone and—under some additional restrictions—hump‐shaped and U‐shaped ones, equilibrium locations can be determined independently of when they are occupied. Our analysis reveals a number of peculiarities of the uniform distribution. Extensions of the model allow for price competition and advertisement in media markets, winner‐take‐all competition, trade‐offs between profits in the short and the long run, and firms operating multiple outlets.

Mechanisms where sellers set the price and are charged a linear commission fee are widely used by real world intermediaries, e.g. by real estate brokers. Empirically these commission fees exhibit very little variance, both across heterogeneous regional markets and over time. So far, there is no theoretical explanation why such seller price setting mechanisms are used and why the linear fees vary so little. In this paper, we first show that in a Bayesian setup seller price setting with linear fees is revenue equivalent to the intermediary optimal direct mechanism derived by Myerson and Satterthwaite (1983) if and only if the seller's cost is drawn from a generalized power distribution. Whenever such a mechanism is optimal, the fee structure is independent of the distribution from which the buyer's valuation is drawn. Second, we derive the intermediary optimal direct mechanism when there are many buyers and possibly many sellers and we show that with one seller any standard auction with linear fees and reserve price setting by the seller (which are used e.g. by eBay) implements this mechanism if the seller's cost is drawn from a power distribution and if buyers' valuations are identically distributed. Third, we show that when the number of buyers approaches infinity while there is still one seller, seller price setting and price setting by the intermediary are equivalent, intermediary optimal mechanisms.

We consider Hotelling location games with global and local players. Global players are active in several markets, while local players act in a single market only. The decisive feature is that global players cannot tailor their product to each market but have to choose a location on the Hotelling line that is valid for all markets in which they are active. Obvious examples include the media industry and politics, where competitors typically compete in several markets with basically the same product. We determine equilibrium configurations for simple specifications of such games. We then show that the presence of global players tends to induce lower product diversity across markets. Finally, when the number of firms is endogenous, we show how global players may use their location choice as a preemptive device.

In vertical contracting models with complete information and linear prices, double markups that arise between independent firms provide an efficiency rationale for vertical mergers since these eliminate double markups (EDM). However, the double markups vanish even without vertical integration if the firms are allowed to use two-part tariffs. Hence, the efficiency rationale for vertical mergers in models of complete information requires restrictions on the contracts that firms can use. In a sense, with complete information, two-part tariffs are simply too powerful. If instead one allows incomplete information and removes the restriction on contract forms, then vertical mergers continue to have an effect that is analogous to EDM, but they also have the potential to affect the overall efficiency of the market to the detriment of society. Consequently, the social surplus effects of vertical integration depend on the underlying market structure, and vertical mergers are, in and of themselves, neither good nor bad. We illustrate through an example that with incomplete information, the private benefits from vertical integration tend to be excessive; that is, vertical mergers remain profitable even when they are socially harmful.