An Analysis of Pricing in Horizontal and Vertical Markets: The Case of the Cottonseed Market
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This paper investigates the role of horizontal and vertical market structures in pricing
differentiated products. The conceptual model demonstrates how substitution and
complementarity relationships between products and across vertical channels relate
to market concentration and market size. The model is applied to the U.S.
cottonseed market using data from 2002 to 2007. The econometric investigation
finds evidence of sub-additive pricing in the bundling of patented biotech traits.
Vertical organization is found to affect pricing and the exercise of market power.
While the analysis shows that higher market concentration is associated with higher
prices, it also uncovers evidence of complementarity effects that reduce price
enhancements. Our simulation approach is applicable for pre-merger analysis of
industries producing differentiated products and exhibiting similar market
complexities.