121 vertical practices

121 vertical practices - Vertical Practices Economics 121...

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Vertical Practices Economics 121 Fall 2007 Professor Joseph Farrell
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“Vertical” • Firms are in complementary relationship – One’s output is another’s input: microprocessors and PCs – Products are used together: microprocessors and DRAM • Each wants other to lower price, improve product, etc. • Coordination looks good
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Vertical Problem • Firms A and B both do better, and consumers do better too, if “coordinate” • How to do it? • How should policy diagnose whether this is what’s going on? – “Coordination” sinister if firms (would) compete
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Manufacturer-retailer contracts • If M sets wholesale price w>c, then • R will treat w as its cost, impose further markup • Excessive markup: everyone loses – Bigger deadweight loss: not zero-sum – Metaphor for non-price effects: stockouts • What should they do?
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Smart contracting • If R chooses quantity, set w=c and let M profit via fixed payment from R – In what “model” is this optimal? • Unrealistic—why?
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This note was uploaded on 09/29/2008 for the course ECON 121 taught by Professor Woroch during the Fall '07 term at Berkeley.

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121 vertical practices - Vertical Practices Economics 121...

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