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Unformatted text preview: ning bidder would offer P to the manufacturer
(under perfect competition)
Then MF could break promise and offer a second
license, and would get P/2 from the second retailer. (1st
retailer would incur loss of P/2)
MF could continue this practice….
Of course, retailers could anticipate this, and nobody
would bid for selling the brand.
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
profit P, but if no credible commitment
possible (if there are many potential
franchisees), it can end up with zero
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
retailers Foreclosure of rival downstream firm will arise as MF
will not supply good to other retailers
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 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
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
27 The commitment problem Resale price maintenance If MF guarentees industry-wide prices, commitment problem is
Still legal in Europe: e.g. books, pharmaceuticals Retailers are not allowed to sell at discount price (they can be taken
to Most favoured Nation clause Whenever MF gives discount to a retailer, all others are also
entitled to it. No incentive to deviate from previous contracts with
Problem: observability of discounts enforcement difficult
Current practice: if MF gets caught by discriminating among
retailers, heavy fines may be the result abuse of dominant
position on upstream market.
BUT: the „transparency“ of prices helps firms with market power
to keep prices high welfare detrimental.
28 Inter-Brand Competition Now:
Now: several manufacturers sell through
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
market, as MF‘s wholesale price is
D1‘s This will make D2 also willing to raise
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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This note was uploaded on 01/22/2014 for the course ECON D0T32A taught by Professor Czarnitzkidirk during the Spring '13 term at Katholieke Universiteit Leuven.
- Spring '13