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Vertical restraints and horizontal control

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Author Info

  • Robert Innes
  • Stephen F. Hamilton

Abstract

This article considers vertical restraints in a setting in which duopoly retailers each sell more than one manufactured good. Vertical restraints by a dominant manufacturer enable the firm to acquire horizontal control over a competitively supplied retail good. The equilibrium contracts produce symptoms that are consistent with a variety of observed retail practices, including slotting fees paid to retailers by competitive suppliers, loss leadership, and predatory accommodation with below-cost manufacturer pricing for the dominant brand(s). Applications are developed for supermarket retailing, where the manufacturer of a national brand seeks to control the retail pricing of a supermarket's private label, and for convenience stores, where a gasoline provider seeks to control the retail pricing of an in-store composite consumption good. Copyright (c) 2009, RAND.

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 40 (2009)
Issue (Month): 1 ()
Pages: 120-143

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Handle: RePEc:bla:randje:v:40:y:2009:i:1:p:120-143

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References

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  1. Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 283-98, March.
  2. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
  3. Bolton, Patrick & Bonanno, Giacomo, 1988. "Vertical Restraints in a Model of Vertical Differentiation," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 555-70, August.
  4. Michael D. Whinston, 1989. "Tying, Foreclosure, and Exclusion," NBER Working Papers 2995, National Bureau of Economic Research, Inc.
  5. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
  6. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
  7. Nicholas Economides, 2001. "The Microsoft Antitrust Case," Journal of Industry, Competition and Trade, Springer, vol. 1(1), pages 7-39, March.
  8. MacLeod, W.B. & Malcomson, J.M., 1994. "Contract bargaining with symmetric information," Discussion Paper Series In Economics And Econometrics 9409, Economics Division, School of Social Sciences, University of Southampton.
  9. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  10. Bagwell, Kyle & Ramey, Garey, 1994. "Advertising and Coordination," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 153-72, January.
  11. Reiffen, David, 1999. "On the equivalence of resale price maintenance and quantity restrictions," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 277-288, February.
  12. Innes, Robert & Hamilton, Stephen F., 2006. "Naked slotting fees for vertical control of multi-product retail markets," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 303-318, March.
  13. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 265-97, October.
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Cited by:
  1. Gabrielsen, Tommy Staahl & Johansen, Bjørn Olav, 2013. "Resale Price Maintenance And Up-Front Payments: Achieving Horizontal Control Under Seller And Buyer Power," Working Papers in Economics 02/13, University of Bergen, Department of Economics.
  2. Noriaki Matsushima & Akira Miyaoka, 2013. "Who benefits from resale-below-cost laws?," ISER Discussion Paper 0875, Institute of Social and Economic Research, Osaka University.

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