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Demand Uncertainty and Price Maintenance: Markdowns as Destructive Competition

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Author Info
Deneckere, Raymond
Marvel, Howard P
Peck, James

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Abstract

This paper offers a new theory of destructive competition. The authors compare minimum resale price maintenance to retail market-clearing in a model with a monopolistic manufacturer selling to competitive retailers. In both the resale price maintenance and flexible-price games, retailers must order inventories before the realization of demand uncertainty. The authors find that manufacturer profits and equilibrium inventories are higher under resale price maintenance than under market-clearing. Surprisingly, consumer surplus can also be higher, in which case unfettered retail competition can legitimately be called 'destructive.' Copyright 1997 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 87 (1997)
Issue (Month): 4 (September)
Pages: 619-41
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Handle: RePEc:aea:aecrev:v:87:y:1997:i:4:p:619-41

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  1. Canoy, Marcel & van der Ploeg, Frederick & van Ours, Jan C, 2005. "The Economics of Books," CEPR Discussion Papers 4892, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Tatsuhiko Nariu & David Flath & Atsuo Utaka, 2009. "Returns System with Rebates," ISER Discussion Paper 0744, Institute of Social and Economic Research, Osaka University. [Downloadable!]
  3. Horst Raff & Nicolas Schmitt, 2005. "Why Parallel Trade may Raise Producers Profits," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  4. Diego Escobari & Li Gan, 2007. "Price Dispersion under Costly Capacity and Demand Uncertainty," NBER Working Papers 13075, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Howard Marvel, 2003. "On the Economics of Branded Open Supply," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 10(2), pages 213-223, July. [Downloadable!] (restricted)
  6. Edward Schlee, . "Expected Consumer's Surplus as an Approximate Welfare Measure," Working Papers 2144340, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
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  7. Hao Wang, 2005. "Retailer Heterogeneity, Intra-Brand Competition and Social Welfare," Journal of Industry, Competition and Trade, Springer, vol. 5(2), pages 87-97, June. [Downloadable!] (restricted)
  8. Robert L. Earle & Karl Schmedders & Tymon Tatur, 2002. "Price Caps and Uncertain Demands," Discussion Papers 1340, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  9. Perona, Mathieu, 2009. "Bookshop, blockbusters and readers’ tastes: a new appraisal of the fixed book price," MPRA Paper 17857, University Library of Munich, Germany. [Downloadable!]
  10. Hao Wang, 2001. "Resale Price Maintenance in an Oligopoly with Uncertain Demand," Working Papers 01-11, Ohio State University, Department of Economics. [Downloadable!]
  11. Frederick van der Ploeg, 2004. "Beyond the Dogma of the Fixed Book Price Agreement," Journal of Cultural Economics, Springer, vol. 28(1), pages 1-20, February. [Downloadable!] (restricted)
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  12. James D. Dana & Kathryn Spier, 2000. "Revenue Sharing, Demand Uncertainty, and Vertical Control of Competing Firms," Econometric Society World Congress 2000 Contributed Papers 1511, Econometric Society. [Downloadable!]
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