Double marginalization is a vertical externality that occurs when two firms with market power (i.e., not in a situation of perfect competition), at different vertical levels in the same supply chain, apply a mark-up to their prices.[1] This is caused by the prospect of facing a steep demand curve slope, prompting the firm to mark-up the price beyond its marginal costs.[2] Double marginalization is clearly negative from a welfare point of view, as the double markup induces a deadweight loss, because the retail price is higher than the optimal monopoly price a vertically integrated company would set, leading to underproduction.[3] Thus all social groups are negatively affected because the overall profit for the company is lower, the consumer has to pay more and a smaller amount of units are consumed.
^Gabrielsen, Tommy., Johansen, Bjorn Olav., Shaffer, Greg. (2018). Double Marginalization and the Cost of Shelf Space, Konkurransetilsynet
^Badasyan, Narine., Goeree, Jacob K., Hartmann, Monica., Holt, Charles., Morgan, John., Rosenblat, Tanya., Servatka, Maros., Yandell, Dirk. (2005). Vertical Integration of Successive Monopolists: A Classroom Experiment, National Science Foundation and the University of Virginia Bankard Fund.
^Mukherjee, Kankana. (2015). “Double Monopoly Markup” Wiley Encyclopedia of Management
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