As rpm better under demand uncertainty non linear

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Unformatted text preview: RPM under cost uncertainty. under NOTE: We used monopoly example, but double monopoly but marginalization occurs always if there is market power at both levels. Price above level that would be optimal for both Price vertical structure vertical 18 18 Free-Riding in provision of services Horizontal externalities between Horizontal retailers can cause inefficiencies from point of view of vertical chain. point Quality and level of services provided Quality by retailers. by If services cannot be 100% If appropriated by one retailer, others can free-ride on it, resulting in underprovision of services profits of manufacturer reduced of Again, vertical integration or restraints Again, help to solve the problem help Upstream firm (manufacturer) Retailer I Retailer II Consumers 19 19 Free-Riding in provision of services City with several shops selling same product possible service: Hire qualified personnel to consult potential buyers; or Hire advertising for product advertising Client may be more willing to buy the product, but not Client necessarily at this shop If other shop has no customer service, it can have lower price, If and customers will buy there. and Result: non of the shops will do big efforts to sell product bad Result: for consumers and manufacturer in worst case, retailers would not sell any unit of the product would Manufacturer could Manufacturer divide city in different areas and appoints exclusive distributors fix retail price Result: vertical integration/restraints reduce free-riding among Result: retailers to the benefit of manufacturer and consumers retailers 20 20 Free-Riding in provision of services In In reality, retailers differentiate themselves from others in order to appropriate the returns on service free-riding problem is reduced reduced credit to consumers post-sales services provided by the store physical appearance of the shop and location physical of the shop of 21 21 Other efficiency reasons Quality certification service e.g. have products on stock or fancy shop appearance will e.g. incur cost other shops sell cheaper again RPM would help or selective distribution only certain shops are allowed to sell or the good (see e.g. „authorized car dealers“) the Free-Riding among producers Technical support, promotion, training, financing will stimulate Technical retailer‘s investment into services retailer‘s Producers of other goods that are sold by these retailers would Producers benefit solve by exclusive dealers: your retailers are not allowed to sell solve competing products. competing 22 22 The Commitment Problem Adverse Adverse effects on welfare can occur if vertical agreements help upstream firm to keep prices high keep but in absence of such agreements, it but would not be able to do this. would 23 23 The Commitment Problem MF has successful brand of clothes known everywhere, but product has not been sold in a given region Suppose expected profits from entering the region is P. Suppose Several potential franchisees exist in the region MF promises to give one exclusive license to a retailer The win...
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