vertical_price

vertical_price - Vertical Price Restraints 1 Introduction...

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1 Vertical Price Restraints
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2 Introduction Many contractual arrangements between manufacturers Some restrict rights of retailer Can’t carry alternative brands Expected to provide services or to deliver product in a specific amount of time Some restrict rights of manufacturer Can’t supply other dealers Must buy back unsold goods Some involve restrictions/guidelines on pricing
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3 Resale Price Maintenance Resale Price Maintenance is the most important type of vertical price restriction. Under RPM agreement Retailer agrees to sell at manufactured specified price RPM agreements have a long and checkered history Until recently, considered per-se illegal In the late 90’s: rule of reason Usually admissible if involve a maximum price
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4 RPM Agreements and Double Marginalization one upstream and one downstream monopolist manufacturer and retailer upstream firm has marginal costs c sells product to the retailer at price r per unit no other retail costs: one unit of input gives one unit of output retail faces the final demand.
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5 RPM and Double Marginalization Manufacturer Marginal costs c wholesale price r Price P Consumer Demand
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6 A very simple example • Upstream and downstream firms have marginal cost zero • Three types of consumers of equal size. Demand for downstream firm is given by the following table: • Optimal integrated price is 3 giving total profits 6. 2 3 1 5 q p Lets find demand for the upstream firm. - If it sets a price r = 1: downstream firm sets p=3, q=2, π u =2, π d =4 or p = 5, q =1, π u =1, d =4 - If it sets a price r = 2, downstream set p = 5, q =1, u =2, d =3 - Optimal to set r = 5 - ε so the downstream firm sets p =5, q =1, u =5 −ε , d = ε . • Profits are lower than if integrated • Double markup
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RPM and Double Marginalization Demand: P = A-BQ Consider the retailer’s decision identify profit-maximizing output set the profit maximizing price Price Quantity Demand A A/B marginal revenue downstream is MR = A – 2BQ MR A/2B retail marginal cost is r MC r equate MC = MR to give the quantity Q = (A - r)/2B A - r 2B identify the price from the demand curve: P = A - BQ = (A + r)/2 (A+r)/2 profit to the retailer is (P - r)Q which is π D = (A - r) 2 /4B profit to the manufacturer is (r-c)Q which is π M = (r - c)(A - r)/2B Retail Profit c Man. Profit
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vertical_price - Vertical Price Restraints 1 Introduction...

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