Can Vertical Separation Reduce Non-Price Discrimination and Increase Welfare?

We investigate if vertical separation reduces non-price-discrimination and increases welfare. Consider a differentiated products duopoly, where a vertically integrated incumbent and a downstream entrant, which requires access to the incumbent's wholesale services, sell horizontally and vertically differentiated products. The wholesale unit can degrade the quality of input it supplies. We show that separation of the incumbent can, but need not, reduce discrimination against the entrant. Furthermore, with separation the incumbent's retail unit may start to be discriminated against. Vertical separation impacts social welfare through two effects. First, through the double-marginalization effect, which is negative. Second, through the discrimination effect, which can be positive of negative. Hence, the net welfare impact of vertical separation is negative or potentially ambiguous.

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