Suppose several potential franchisees exist in the

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Unformatted text preview: ning bidder would offer P to the manufacturer The (under perfect competition) (under Then MF could break promise and offer a second Then license, and would get P/2 from the second retailer. (1st retailer would incur loss of P/2) retailer MF could continue this practice…. Of course, retailers could anticipate this, and nobody Of would bid for selling the brand. would 24 24 The Commitment Problem MF MF has to find a reasonable way to commit itself in credible way and not add franchisees to market. franchisees Clothes producer could have monopoly Clothes profit P, but if no credible commitment possible (if there are many potential franchisees), it can end up with zero profits profits 25 25 The commitment problem Vertical merger Merge Merge with one of the retailers to internalize profits made by downstream firm made No incentive to offer better/other contracts to other No retailers retailers Foreclosure of rival downstream firm will arise as MF Foreclosure will not supply good to other retailers will In In absence of competing upstream suppliers a vertical merger would be maximally detrimental monopoly prices If upstream competitors exist, adverse effects will be limited the larger the upstream market power, the more attention competition authorities should pay to vertical practices 26 26 The commitment problem Exclusive territories In In order to restore market power, MF could credibly restrict itself to supply product only to one retailer in a geographic area one If the contract is legal, problem of MF is solved BUT: this harms welfare!!! Consumers Consumers pay monopoly price; higher producer surplus does not outweigh lower consumer surplus surplus 27 27 The commitment problem Resale price maintenance If MF guarentees industry-wide prices, commitment problem is If solved solved Still legal in Europe: e.g. books, pharmaceuticals Retailers are not allowed to sell at discount price (they can be taken Retailers to court) to Most favoured Nation clause Whenever MF gives discount to a retailer, all others are also Whenever entitled to it. No incentive to deviate from previous contracts with retailers retailers Problem: observability of discounts enforcement difficult Problem: Current practice: if MF gets caught by discriminating among Current retailers, heavy fines may be the result abuse of dominant position on upstream market. position BUT: the „transparency“ of prices helps firms with market power BUT: to keep prices high welfare detrimental. 28 28 Inter-Brand Competition Now: Now: several manufacturers sell through several retailers retailers Vertical Restraints as Collusive Devices Leverage and foreclosure 29 29 Vertical Chain Suppose Suppose one MF (U1) increases wholesale price, and sells through an exclusive dealer (D1) exclusive D1 will also increase its price in D1 market, as MF‘s wholesale price is D1‘s cost D1‘s This will make D2 also willing to raise This price price Vertical chains make more profits BUT: total welfare lower! U1 U2 D1 D2 Consumers 30 30 Vertical Restraints as Collusive Devices RPM may favor collusion increases price observability If RPM is absent, and shocks in retail marke...
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