The Balance of Power Between Producers and Retailers: a Differentiation Model.

This paper argues that the balance of power between producers and retailers depends on the relative degrees of differentiation at the two levels of the vertical structure. The authors propose an extension of Hotelling's model in which two producers, competing in prices with horizontally differentiated products, face two horizontally differentiated retailers also competing in prices. They study the setting of producers' and retailers' margins. They show that when retailers are more differentiated than producers, they dominate the relationship and their margin is higher than producers'.