iphone - The iPhone Goes Downstream Mandatory Universal...

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The iPhone Goes Downstream: Mandatory Universal Distribution Larry S. Karp Jeffrey M. Perloff February 2010 Abstract Apple’s decision to market iPhones using a single downstream vendor has prompted calls for Mandatory Universal Distribution (MUD), whereby Apple would have to sell to all potential vendors. We show that an upstream monopoly might want to use one or more downstream vendors, and society might benefit or be harmed by MUD. However, if the income elasticity of demand for the new good is greater than the income elasticity of the existing generic good, we find that MUD leads to a higher equilibrium price for both the new good and the generic, and therefore lowers consumer welfare. Keywords: vertical restrictions, mandatory universal distribution, new product JEL classification numbers L12, L13, L42 We benefitted from comments by Dennis Carleton, Rich Gilbert, Jeff LaFrance, Hal Varian, Glenn Woroch, Brian Wright, and participants at the UC Berkeley-Stanford 2009 “IO Octoberfest”. The usual disclaimer applies. Department of Agricultural and Resource Economics, 207 Giannini Hall, University of California, Berkeley CA 94720 email:[email protected] Department of Agricultural and Resource Economics, 207 Giannini Hall, University of California, Berkeley CA 94720 email:[email protected]
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1I n t r o d u c t i o n Apple allows only one U.S. wireless phone provider, AT&T, to distributes its iPhone. Consumer organizations such as Consumers Union want the government to require that the iPhone be available through many or all downstream providers. In 2009, a Senate antitrust panel held hearings and Senators listed steps that they wanted the FCC and the Department of Justice to take to make the downstream industry more competitive (Consumer Reports 2009). The issue of mandating universal distribution (MUD) has ariseninmanymarkets(e.g .,moviesandother durables) in the past and will arise with new, disruptive inventions. One of the chief arguments by proponents of MUD appeals to the conventional wisdom that equilibrium price falls when there are more firms in the market. It is, of course, well-known that if the upstream industry is competitive, then in many settings, raising the number of oligopolistic downstream firms lowers the price to final consumers. However, this relation may not hold if the upstream provider is a monopoly that can adjust its wholesale price to downstream firms depending on the number of vendors that carry its product. We present conditions under which MUD hurts or helps consumers and society. We assume that there is a vertical industry structure, with two types of upstream firms. A monopoly produces a new product (e.g., Apple’s iPhone). A competitive industry produces a generic product. Downstream, a quantity-setting oligopoly sells the generic and some or all of the firms also sell the new product.
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iphone - The iPhone Goes Downstream Mandatory Universal...

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