Market Concentration and the Analysis of Vertical Market Structures

This paper investigates the pricing of differentiated products in a vertical sector, with a focus on the role of industry concentration. We propose concentration indices that extend the classical Hirschman-Herfindahl Index (HHI) to include vertical structures that manage differentiated products. We also identify how substitution/complementarity among products affects pricing. We compare our proposed indices with those proposed by Gans (2007). Additionally, we illustrate the utility of our approach by applying it to an analysis of mergers in the gasoline market. We note that our methodology is particularly applicable to analyses of those merger policies that involve upstream or downstream divestiture.