Double Marginalization

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Definition: Double Marginalization

Double Marginalization is the phenomenon in which different firms in the same industry that have their respective market powers but at different vertical levels in the supply chain (example, upstream and downstream) apply their own markups in prices.

Due to these markups individually a deadweight loss is induced and because of both the markups the deadweight loss occurs twice thus making it worse off for the whole market due to double marginalization.

One way of avoiding the losses due to double marginalization is by integrating the two firms vertically and thus reducing at least one of the dead weight losses. This can be done through merger and acquisition of one of the firm by the other firm in the supply chain.

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