Vertical Boundaries and the Influence of Social Comparison

Abstract

We study how inter-firm social comparison can alter the choice of two competing manufacturers between vertical integration and vertical separation to independent, status-concerned retailers. Status is determined by the difference in retailers’ market shares. The novelty of our paper is that in line with empirical evidence, the intensity of social comparison (i) depends on the distance between retail outlets, and (ii) can be influenced by the manufacturer by adjusting the outlet’s location. In contrast to the commonly studied case of a distance-independent intensity of status concern, social comparison with a distance-dependent intensity of status concern predicts different optimal firm boundaries.