Question

Weld-Rite is a manufacturer of welding safety equipment. They use a network of regional distributors to sell their products. However, their pricing is higher than their competitors because of “the double marginalization problem.” Do some research by looking up the double marginalization problem. What is it? Propose two possible solutions to help Weld-Rite overcome the double-marginalization problem.

Answer 1

Double marginalization is phenomenon when firm have their market power but supply chain vertical levels are different i.e. upstream and downstream. These add on to their own markup price hence deadweight loss occurred and hence cost escalated. We know that in different industrial setup a firm cannot control the supply chain verticals that is procuring materials and distributing through distributor. They both have their own mark up for the product. When the final product reached to the market, its cost is already higher. This eroded the competitive edge of the firm in the market. Two possible solution for Weld-Rite are that it should takeover either or one firm in the vertical to minimize the cost and the other one is integration of the whole structure so that margin can be optimal.