Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology Lecture Note on Double Marginalization When firms in subsequent stages of a value chain have market power, the total profits will be lower than what would be jointly optimal for them. The reason is that each firm, in using its market power, will limit its output in order to increase prices and thus profits. In doing so, however, it does not take into account the impact these actions have on the other firms in the value chain. Jointly, these firms will thus exert too much market power for their own good. To see this in more practical terms, consider a monopolist newspaper company that sells newspapers to newsstands. Each newsstand has a monopoly in its own territory. Assume for simplicity that the marginal costs of producing a newspaper and of selling it are both zero and that there are no fixed costs. Consider the relationship between the newspaper company and one of the newsstands.
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