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Vertical Boundaries and Endogenous Intensity of Social Comparison

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We study how interfirm social comparison can alter the choice of two competing manufacturers between vertical integration and vertical separation if retailers are status-concerned. Status is determined by the difference in retailers' market shares. The novelty of our approach is that in line with empirical evidence, the intensity of social comparison (i) depends on the distance between retail outlets, and (ii) can be influenced by the manufacturers by adjusting their outlets' locations. In contrast to the commonly studied case of a distance-independent intensity of status concern, social comparison with a distance-dependent intensity of status concern might predict different vertical boundaries. (JEL: D03, L13, L22, R12)
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Keywords: price competition; social comparison; status concerns; vertical integration; vertical separation

Appeared or available online: October 4, 2018

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