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EconGovFinalStudyGuide

EconGovFinalStudyGuide - A f i rm is vertically integrated...

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A firm is vertically integrated when it performs various functions for itself that are at different stages of production and/or distribution. 1. enter another stage by building new facilities (i.e., internal expansion ) 2. merge with a firm at another stage (i.e., vertical merger ) 3. enter a long-term contract with a firm at another stage (e.g., franchise or exclusive dealing contract with another firm) Forward & Backward Vertical Integration - Forward V.I. – this involves integration into a stage that is closer to the final consumer (e.g., a manufacturer merging with a chain of retail stores)—the firm is integrating downstream . - Backward V.I. – this involves integration into an earlier stage of production or distribution (e.g., a manufacturing firm acquires an input supplier)—the firm is integrating upstream . The main reason that firms vertically integrate is to reduce costs . Since this usually benefits consumers and society in general, vertical integration typically should be legal under the antitrust laws. Does V.I. Increase Entry Barriers? - Vertical integration usually does not raise entry barriers. Resale Price Maintenance (RPM) is a type of vertical restriction imposed by an upstream supplier ( e.g. manufacturer) on a downstream independent distributor (a wholesaler or retailer) of the upstream firm’s product
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- Minimum RPM – The upstream seller ( e.g. , a manufacturer) restricts the downstream seller ( e.g. , a retailer) from lowering its resale price below a specified minimum price. - Maximum RPM – The upstream seller ( e.g. , a manufacturer) restricts the downstream seller ( e.g. , a retailer) from raising its resale price above a specified maximum price. Tie-in Sale : a seller with market power for one product— the tying product — refuses to sell the product to a customer unless the customer also agrees to buy another product— the tied product —from the seller. Why do Firms Use Tying Arrangements? 1. To protect the goodwill of the seller. 2. To raise entry barriers and extend monopoly power from one market to another market. 3. To price discriminate and/or increase the profits of the seller If a plaintiff can prove that a seller conditions the sale of one good on the purchase of a separate tied good , the Sherman Act is violated under a per se rule if he can also prove: 1. The seller has sufficient market power for the tying good to restrain competition for the tied good , and 2. A not insubstantial volume of commerce is affected. Merger : two firms that had been separate come under common ownership or control by 1. Stock acquisition - buy shares of stock. 2. Asset acquisition - buy assets.
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3. Consolidation - corporations dissolve & combine assets to form new corporation. Horizontal Merger - the firms had been selling the same product in the same geographic market (i.e. they were competitors before the merger). The merger results in (a) there being one less firm in the relevant market and (b) the market share of the post-merger firm is greater than what either of the merging firms had before.
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