If double marginalization exists between an upstream firm and a downstream firm, the vertical integration of the two firms will generate more economic profit.

Question

Quizplus · Accepted Answer

When two firms face double marginalization, they mark up their prices to cover the costs of the markup from the other firm. This results in higher prices and lower quantities for consumers, reducing the overall economic efficiency. Vertical integration eliminates the double markup and can lead to a more efficient outcome, generating more economic profit.

If Double Marginalization Exists Between an Upstream Firm and a Downstream