Why “Two Monopolies in a Row” Is Worse Than One – The Economics of Double Marginalisation

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Imagine a factory that is the only producer of a key input—say, high-grade steel. Downstream, a single car-maker is the only firm that turns that steel into sports cars. Each layer of the supply chain is a monopolist. You might guess the final car price simply reflects one fat monopoly mark-up. In fact, it is worse. The two firms stack their mark-ups on top of each other, pushing price higher and output lower than a single integrated monopolist would. Economists call this phenomenon double marginalisation. It crops up in everything from cable television to mobile-app stores and is a central argument for certain vertical mergers and long-term supply contracts.

The Basic Logic: Marginal Cost Meets Mark-Up—Twice

Start with a single monopoly. It sets quantity where its marginal revenue equals marginal cost (MR = MC) and then charges the highest price consumers will pay for that quantity. The wedge between price and marginal cost captures the firm’s market power.

Now place a second monopoly downstream. The upstream firm sells its input at a monopoly price to the downstream monopolist. That price becomes part of the downstream firm’s cost structure—effectively inflating its marginal cost. When the downstream monopolist then performs its own MR = MC calculation, it treats the monopoly input price as a real cost and tacks on a second mark-up. Consumers see both layers in the final sticker price. Output shrinks further and overall welfare falls by more than if one firm controlled both stages.

Quick Numerical Example

Suppose the market demand for finished widgets is P = 100 – Q, and producing each widget requires one unit of a specialized component.

• Upstream monopolist’s production cost: 10 per component.
• Downstream monopolist’s other costs: zero.

Step 1: Upstream Monopoly Pricing

-Treat the component as the final product for now.
-Marginal revenue equals 100 – 2Q. Setting 100 – 2Q = 10 gives Q = 45.
-The component price charged to the downstream firm is P = 100 – 45 = 55.

Step 2: Downstream Monopoly Pricing

-The downstream firm’s marginal cost is now 55 (the input price).
-Its marginal revenue is again 100 – 2Q. Set 100 – 2Q = 55 → Q = 22.5.
-Final consumer price is P = 100 – 22.5 = 77.5.

Had a single integrated monopolist controlled both stages, its true marginal cost would have been 10, not 55. Solving 100 – 2Q = 10 yields Q = 45 and a consumer price of 55, the same numbers the upstream monopoly had set for components. In other words, double marginalisation raised the final price from 55 to 77.5 and cut output in half.

The Deadweight Loss Multiplies

The extra deadweight loss—the trades that now never occur—comes from two layers of output restriction. Each firm focuses only on its own margin, unaware (or uninterested) that its high price imposes a cost on the other stage and ultimately on consumers. The outcome is socially worse than a single monopoly, which is already inefficient relative to perfect competition.

How Firms Try to Fix the Problem

Because both monopolists lose profit from the reduction in volume, they have incentives to bargain their way out of double marginalisation. By restructuring payments, these mechanisms compress two mark-ups into one and expand total profit—usually benefiting consumers along the way.

Vertical Integration

The upstream and downstream monopolists merge. With one decision-maker, there’s only a single mark-up. Regulators often approve such mergers when they convincingly solve double marginalisation without harming competition elsewhere.

Two-Part Tariffs or Franchise Fees

The input supplier charges a low per-unit price (sometimes equal to marginal cost) plus a fixed fee. The downstream firm’s marginal cost falls, output rises, and the fixed fee lets the upstream firm recoup its rent.

Quantity-forcing contracts specify a minimum purchase quantity at a given price, aligning incentives on output. Regarding revenue-sharing agreements, it is common in movie distribution. Studios (upstream) split box-office receipts with theaters (downstream), turning the per-ticket marginal cost into a fraction of revenue instead of a high flat price.

Contracts/ Agreements

Real World Cases

Smartphone App Stores

Apple’s and Google’s 30 % commission can be viewed as a downstream mark-up atop upstream software developers who may themselves have pricing power in certain niches. Debates over alternative payment systems partly revolve around who captures the mark-up and how many layers there are.

Ride-Sharing and Surge Pricing

Drivers are independent contractors with some monopoly power over their own labor. Platforms add a service fee. When both sides exercise pricing power during peak times, the effective fare can exceed what a single integrated provider would charge, leading to regulatory scrutiny.

Cable TV Bundles

Content creators (ESPN, HBO) historically enjoyed monopoly power over blockbuster shows. Cable operators, local monopolists in distribution, added their own margin. Wholesale-pricing battles—and the eventual shift to vertically integrated streaming platforms—illustrate attempts to erase double marginalisation.

Electric-Vehicle Charging

Utilities control the grid (upstream) while charging-station operators set retail prices (downstream). Coordination failures can make public charging expensive and slow network expansion. Some utilities have sought ownership stakes in charging networks to streamline incentives.

Policy Angle: When Is Vertical Integration Good?

Antitrust authorities worry that a merged, vertically integrated firm could foreclose rivals—refusing to sell inputs or shelf space to competing downstream producers. The key question is whether the efficiency gain from eliminating double marginalisation outweighs the potential cost of reduced competition elsewhere. Modern merger guidelines explicitly weigh these countervailing effects.

Double marginalisation sounds wonky, but its fingerprints are on everyday prices—from your cable bill to a night at the movies. Whenever two consecutive levels of a supply chain each possess market power, the final price you see likely includes a mark-up on a mark-up. Because output falls and value is destroyed, both firms have reasons to cooperate, merge, or craft smart contracts that collapse the pricing ladder into a single step. For regulators, investors, and consumers, recognising double marginalisation is essential to understanding when vertical deals are harmful market power grabs and when they are efficiency-enhancing fixes.