U1 u2 d1 d2 consumers 30 30 vertical restraints as

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Unformatted text preview: t If occur, final prices will change occur, BUT: MFs have difficulties to evaluate if BUT: prices changed due to shocks or due to deviation from cartel deviation RPM make collusion more likely as retail RPM price variation is eliminated price 31 31 Vertical Restraints as Collusive Devices Common agency Suppose Suppose 2 MFs sell through a common retailer in downstream market downstream MFs charge franchise fee to retailer, but delegate MFs price decision to retailer price The common agent will pick collusive price MFs price at marginal cost, as profits are taken MFs through the fee. Result: retailers behave as if MFs had directly sold to Result: consumers – maximizing joint profits of the upstream firms firms 32 32 Leverage and Foreclosure Exclusive Dealing Firm Firm may deter entry into market, by foreclosing crucial input, i.e. the distribution network network Two opinions in economics: „Chicago school“ Two and „post Chicago“. and 33 33 Leverage and Foreclosure Chicago school exclusive exclusive contract between buyer (D) and seller (U) may not occur (exclusive = D only sells good of U) sells D has no incentive to sign contract with U, as has there may be other – at some point – more efficient upstream firms efficient By rejecting the contract, D could even By stimulate entry into the upstream market, and get a lower wholesale price get 34 34 • If buyer purchases from entrant, she gets CS = blue triangle + red rectangle + green triangle p,c • If from former monopolist (with higher cost) only CS = blue triangle • Thus monopolist would have to bid red rectangle + green triangle, but this is not possible as M only earns red triangle p(M) c(M) c(e) q(M) q(e) q 35 35 Leverage and Foreclosure Post Chicago Suppose Suppose by excluding the entrant the incumbent monopolist does not only get monopoly profit in 1 market but also in others market E.g. E.g. because entrant cannot realize economies of scope between the two markets between Then Then it could be possible to make an offer high enough to induce the buyer to accept the exclusive retail contract If If there are many buyers that accept exclusive contract, a single „free“ buyer would have no incentive not to accept as profits for a potential entrant would not be high enough to enter the market. enter 36 36 Exclusionary Effects of Vertical Mergers When are vertical mergers/restraints anticompetitive? Recall from intra-brand competition that it can be Recall detrimental if upstream firm solves the commitment problem and keep prices high commitment Now consider a merger between an upstream Now and downstream firm takes place and What What is the effect on the input price of independent downstream firms, downstream and on the price paid by consumers? 37 37 Exclusionary Effects of Vertical Mergers Is Is it in the interest of the merged firm to continue supplying the other downstream firms, or to raise the input price for them? the If If D‘s serve partially different markets then upstream firm, merged entity would make higher profits firm, If other upstream firms are competitive, raising the If upstream input price may not be pr...
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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.

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