ch19 - Nonprice Vertical Restraints Chapter 19: Nonprice...

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Chapter 19: Nonprice Vertical Restraints 1 Nonprice Vertical Restraints
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Chapter 19: Nonprice Vertical Restraints 2 Introduction Vertical Price Restraints are not the only kinds of vertical restrictions Other common vertical restrictions include Exclusive Dealing: Manufacturer restricts retailer’s ability to buy and sell brands that compete with the manufacturer’s brand, e.g., Coca-Cola may restrain restaurants or other vendors from selling Pepsi products ( Interbrand competition ) Exclusive Selling: Retailer restricts manufacturer from supplying other dealers, e.g., Lexus dealer obtains promise from Toyota not to authorize other Lexus dealers to sell in nearby locations ( Intrabrand competition)
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Chapter 19: Nonprice Vertical Restraints 3 Exclusive Dealing Exclusive Dealing as a way to deal with Free-Riding Advertising and promotion by a manufacturer spills over to raise demand for similar products Example: advertising Tylenol may raise demand not just for Tylenol but also for non-aspirin pain relievers in general Pharmacist may respond to inquiries about pain relievers by substituting lower-cost non-aspirin pain reliever Substitute costs less because it did not pay for advertising Substitute manufacturer free-rides on the advertising of Tylenol No manufacturer advertising and so no information provision could be the result—This is inefficient. Exclusive dealing may solve this problem. No spillovers if dealer sells no substitute products
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4 Exclusive Dealing (cont.) But exclusive dealing can compound monopoly problem Assume two manufacturers and two retailers Retailers (1 and 2) are spatially separated by distance M along a line Consumers are spatially located around a circle at each retail location of radius
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This note was uploaded on 08/08/2011 for the course EC 170 taught by Professor Menegotto during the Fall '08 term at Tufts.

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ch19 - Nonprice Vertical Restraints Chapter 19: Nonprice...

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