Abstract
We study vertical integration of a retailer and an operator in the e-commerce sector. Its impact on consumers involves a tradeoff between competition and double marginalization. The competition effect dominates when the number of independent retailers and operators is sufficiently large. Even when integration of a single retailer-delivery operator pair is initially welfare improving, the resulting market structure may not be sustainable and result in an integrated monopoly that is welfare inferior to the initial independent equilibrium. Multiple integration is typically welfare superior to the integration of a single retailer-delivery operator pair. Integration is more likely to have an adverse effect on welfare when the integrated firm delivers only to rural customers.
We thank Tim Brennan, Leonardo Mautino and John Panzar for their constructive and helpful comments.
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Notes
- 1.
- 2.
For the cases of linear and of constant elasticity demand, analytical solutions can be obtained. However, the expressions are not very telling so that examples are useful to illustrate the cases that can arise.
- 3.
Speaking about Shipping by Amazon service, Neil Saunders, GlobalData Retail Managing Director, said “As much as it makes sense to do this in urban areas, it is unlikely that Amazon will make a move on trying to service the American hinterland (…) Order densities and volumes, along with long travel times between deliveries, in many parts of the country do not justify such an investment”:
In the same vein, Morgan Stanley analysts, including Ravi Shanker, expect Amazon to build out its network in “dense urban areas”:
- 4.
This practice, often referred to as “cream skimming” or “cherry picking” has been a widespread concern in the postal sector both for mail and for parcels.
- 5.
Which is available on the TSE website at the following link https://www.tse-fr.eu/fr/publications/vertical-integration-e-commerce-sector.
- 6.
Or 2 retailers with 4 delivery operators, etc.
- 7.
The other operators’ prices are above marginal costs. With a single delivery area the integrated retailer will then always use its own delivery services.
- 8.
We use the following notation to identify the scenarios. 2*2 or 3*3 etc. refers to a market with 2 or 3 independent delivery operators and retailers; 1i, 1r, 1o, for instance, means that there is one integrated firm, one independent retailer and one independent operator. The other labels follow the same logic and should be self-explanatory.
- 9.
These are of course just illustrations. However, try as we might, we did not manage to find a counter-example.
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Borsenberger, C., Cremer, H., Joram, D., Lozachmeur, JM. (2018). Vertical Integration in the E-Commerce Sector. In: Parcu, P., Brennan, T., Glass, V. (eds) New Business and Regulatory Strategies in the Postal Sector. Topics in Regulatory Economics and Policy. Springer, Cham. https://doi.org/10.1007/978-3-030-02937-1_12
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