Lecture 4b: Vertical Merger and Vertical Restraints (2)
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Outline•Free riding problem in the downstream market•What are the effects of vertical restraints on inter brand competition?•Why vertical restraints and vertical merger may have anticompetitive effect by foreclosing competitors.•How does economic analysis affect the view of antitrust law towards vertical merger and vertical restraints?
Free Riding in Retail Sector•Double marginalization arises since retail sector is not competitive. Now consider problems which arise if retail sector is too competitive.•In a competitive retail market, horizontal externality among retailers often determine an inefficient outcome from the point of view of the vertical structure.•For example, retailers often provide important services such as advertising and marketing activity. If these services have spillover effect which benefit other retailers, the retailers have incentive to free ride other retailers.