Double Marginalization

Double Marginalization occurs when two or more firms in a vertical supply chain — or two firms each controlling a complementary component — each apply a markup to the final consumer price independently. Each firm sets its price to maximise its own profit, ignoring the negative Pricing Externality it imposes on the other firms because its higher price reduces the total quantity all firms share. The result with $N$ symmetric complementary firms is

so total price climbs toward the choke price as $N$ grows, and industry profit collapses.

type: double-marginalisation
A: 10
k: 2

When to use

Invoke double marginalization to explain why decentralised firms over-price relative to an integrated monopolist, why more independent complementary firms make things worse for everyone (consumers and firms), and why Vertical Integration or two-part-tariff contracts are efficiency-enhancing remedies. It also explains the producer→retailer wedge in Topic 2's vertical-relations section (Q^VR = (A−k)/4 vs Q^M = (A−k)/2).