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Vertical Price Restraints and Free Entry Under Asymmetric Information

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  • Leda Maria Bonazzi
  • Raffaele Fiocco
  • Salvatore Piccolo

Abstract

In a vertically related market where the number of manufacturer‐retailer hierarchies is endogenously determined by free entry, we investigate the impact of vertical price restraints on the free‐entry equilibrium and its welfare properties under asymmetric information within each supply hierarchy. We compare the legal regimes of laissez‐faire and ban on resale price maintenance (RPM) under different entry decision modes. Under upstream entry, laissez‐faire generates higher entry and increases consumer surplus, but a ban on RPM enhances total welfare. Socially excessive entry occurs under both legal regimes, and the entry bias declines with the severity of the asymmetric information problem. Conversely, under downstream entry, a ban on RPM stimulates entry and consumer surplus, but laissez‐faire can be total welfare superior. Our results provide antitrust policy implications about vertical price control.

Suggested Citation

  • Leda Maria Bonazzi & Raffaele Fiocco & Salvatore Piccolo, 2021. "Vertical Price Restraints and Free Entry Under Asymmetric Information," Journal of Industrial Economics, Wiley Blackwell, vol. 69(4), pages 854-899, December.
    • Handle: RePEc:bla:jindec:v:69:y:2021:i:4:p:854-899
    DOI: 10.1111/joie.12272
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    2. de Pinto, Marco & Goerke, Laszlo & Palermo, Alberto, 2023. "On the welfare effects of adverse selection in oligopolistic markets," Games and Economic Behavior, Elsevier, vol. 138(C), pages 22-41.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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