The Growth and Welfare Effects of Vertical Separation versus Vertical Integration

Bonanno and Vickers (1988) show that vertical separation is profitable and is of interest to manufacturers collectively, as well as individually, provided that the franchise fees can be used to extract the retailers¡¦ surplus. However, their analysis is derived within the goods market only, and hence ignores the harm caused to the community by the double marginalization. This paper develops a simple endogenous growth model with monopolistic competition, in which both structures of vertical integration and vertical separation can be described, and finds that vertical separation reduces both the balanced growth rate and the social welfare.