ECMC41-Lec8 - ECMC41 Lecture 8 Lecture 8 - Outline 1....

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ECMC41 – Lecture 8
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2 Lecture 8 - Outline 1. Vertical Relationships Vertical restrictions Model of double mark-up 2. Types of Mergers 3. Models of Horizontal Mergers
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3 1. Vertical relationships (1) Vertical integration Reasons and benefits Costs: production, management, legal costs Transaction cost theory (2) Vertical restrictions Types Desirable/undesirable/ambiguous effects (p425-430)
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4 Vertical Restrictions Used to solve problems in (costly) distribution (1) Distributor: ‘‘Double mark-up’’ Solution: Maximum retail price; sales quota; two-part pricing (2) Free-riding among distributors ( Intra-brand competition ) Solution: exclusive territory, restrict # of dealers, set min p, take over marketing effort, subsidize/monitor dealers’ sales effort (3) Free-riding among manufacturers ( Inter-brand competition ) Solution: exclusive dealing (4) Lack of coordination among dealers leading to externalities Solution: use a combination of the above
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5 Some Types of vertical restrictions (1) Resale Price maintenance (RPM) an agreement where the manufacturer sets a min p retailers may charge: (2) Exclusive territory Examples: Franchises, automobile dealers, electronic retailers. (3) Exclusive dealing Examples: Soft drink sales (4) Tie-in sales p p or p p or p p = < , ,
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6 Model 1: Double Mark-up Problem - A simple model Distributor Final good market Manufacturer MC up = m = $2 up up down p p MC = + = 0 Up p down p down down Q p - = 10 Upstream: - Manufacturing cost Downstream: - cost of purchasing: P up - (zero marginal ) cost of selling up up down p p MC = + = 0 2 $ = = m MC up
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7 Scenario 1: With vertical integration 10 4 6 $ Q p - = 10 ( 29 16 $ , 6 $ , 4 2 2 10 , : 2 10 * * * = = = = - = - - = π P Q Q MC MR FOC Q Q Q Max VI VI VI MR VI MC VI =$2 π VI VI VI Q P - = 10 P Q ( 29 8 16 8 ) 8 )( 8 ( 2 1 ) ( 8 $ 2 4 * 6 10 = - - = - - = = - = VI VI VI VI CS PC CS DWL CS VI
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8 Scenario 2: Without VI Distributor: Manufacturer: 2 10 , 2 10 up down down up down down p Q MC p Q MR - = = = - = 6 $ , 2 4 10 = = = - = up up up up
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This note was uploaded on 11/09/2010 for the course ECM ECMC41 taught by Professor Jackparkinson during the Spring '10 term at University of Toronto- Toronto.

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ECMC41-Lec8 - ECMC41 Lecture 8 Lecture 8 - Outline 1....

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