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Vertical control of a distribution network—an empirical analysis of magazines

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  • Stijn Ferrari
  • Frank Verboven

Abstract

How does an upstream firm determine the size of its distribution network, and what is the role of vertical restraints? To address these questions we develop and estimate two models of outlet entry, starting from the basic trade-off between market expansion and fixed costs. In the coordinated entry model the upstream firm sets a market-specific wholesale price to implement the first-best number of outlets. In the restricted/free entry model the upstream firm has insufficient price instruments to target local markets. It sets a uniform wholesale price, and restricts entry in markets where market expansion is low, while allowing free entry elsewhere. We apply the two models to magazine distribution. The evidence is more consistent with the second model where the upstream firm sets a uniform wholesale price and restricts the number of entry licenses. We use the model to assess the profitability of modifying the vertical restraints. A government ban on restriced licensing would reduce profits by a limited amount, so that the business rationale for restricted licensing should be sought elsewhere. Furthermore, introducing market-specific wholesale prices would implement the first-best, but the profit increase would be small, providing a rationale for the current uniform wholesale prices.

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File URL: http://hdl.handle.net/10.1111/j.1756-2171.2011.00156.x
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Bibliographic Info

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

Volume (Year): 43 (2012)
Issue (Month): 1 (03)
Pages: 26-50

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Handle: RePEc:bla:randje:v:43:y:2012:i:1:p:26-50

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References

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  1. repec:bla:restud:v:74:y:2007:i:2:p:625-652 is not listed on IDEAS
  2. Céline Bonnet & Pierre Dubois, 2010. "Inference on vertical contracts between manufacturers and retailers allowing for nonlinear pricing and resale price maintenance," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 139-164.
  3. Gallini, Nancy T. & Winter, Ralph A., 1983. "On vertical control in monopolistic competition," International Journal of Industrial Organization, Elsevier, vol. 1(3), pages 275-286, September.
  4. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 625-652.
  5. Miklós-Thal, Jeanine & Rey, Patrick & Vergé, Thibaud, 2010. "Vertical relations," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 345-349, July.
  6. Timothy F. Bresnahan & Peter C. Reiss, 1985. "Dealer and Manufacturer Margins," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 253-268, Summer.
  7. 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.
  8. Kaiser, Ulrich & Song, Minjae, 2009. "Do media consumers really dislike advertising? An empirical assessment of the role of advertising in print media markets," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 292-301, March.
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Cited by:
  1. Müller, Daniel & Herweg, Fabian, 2013. "Price Discrimination in Input Markets: Quantity Discounts and Private Information," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79978, Verein für Socialpolitik / German Economic Association.
  2. PEETERS, Thomas & SZYMANSKI, Stefan, 2012. "Vertical restraints in soccer: Financial fair play and the English Premier League," Working Papers 2012028, University of Antwerp, Faculty of Applied Economics.

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