IDEAS home Printed from https://ideas.repec.org/a/taf/ijecbs/v24y2017i1p53-72.html
   My bibliography  Save this article

Profit-Maximising Rigid Prices and Vertical Integration

Author

Listed:
  • Nigel Wadeson

Abstract

This article explores profit-maximising rigid pricing for a price-setting firm and relates the results to vertical integration, which is an important area of corporate strategy and antitrust policy. The setting of a profit-maximising rigid price is investigated in the face of a known distribution of short-run demand levels as a compromise between the flexible prices that would be appropriate in the short run at different levels of demand. The price and level of capacity are therefore set to maximise expected profits across varying levels of demand. With the help of computer simulations, it is shown that price rigidity increases the incentives for vertical integration, particularly where upstream production is capital intensive, due to the increased importance of rationing. The incentives will also be particularly strong for more efficient and more capital-intensive downstream production with low short-run marginal costs.

Suggested Citation

  • Nigel Wadeson, 2017. "Profit-Maximising Rigid Prices and Vertical Integration," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 24(1), pages 53-72, January.
    • Handle: RePEc:taf:ijecbs:v:24:y:2017:i:1:p:53-72
    DOI: 10.1080/13571516.2016.1199457
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/13571516.2016.1199457
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/13571516.2016.1199457?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    2. Warren-Boulton, Frederick R, 1974. "Vertical Control with Variable Proportions," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 783-802, July/Aug..
    3. Carlton, Dennis W, 1979. "Vertical Integration in Competitive Markets under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 27(3), pages 189-209, March.
    4. Crew, Michael A & Fernando, Chitru S & Kleindorfer, Paul R, 1995. "The Theory of Peak-Load Pricing: A Survey," Journal of Regulatory Economics, Springer, vol. 8(3), pages 215-248, November.
    5. Hendrikse, George & Peters, Hans, 1989. "A note on partial vertical integration," Economics Letters, Elsevier, vol. 30(3), pages 249-252, September.
    6. MacDonald, James M, 1985. "Market Exchange or Vertical Integration: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 327-331, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. George W. J. Hendrikse, 1998. "Screening, Competition and the Choice of the Cooperative as an Organisational Form," Journal of Agricultural Economics, Wiley Blackwell, vol. 49(2), pages 202-217, June.
    2. Davide Vannoni, 1994. "Perche' Le Matrici Intersettoriali Per Misurare L'Integrazione Verticale ?," CERIS Working Paper 199403, CNR-IRCrES Research Institute on Sustainable Economic Growth - Torino (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY.
    3. Emons, Winand, 1996. "Good times, bad times, and vertical upstream integration," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 465-484, June.
    4. Aekapol Chongvilaivan & Jung Hur, 2012. "Trade Openness and Vertical Integration: Evidence from the U.S. Manufacturing Sector," Southern Economic Journal, John Wiley & Sons, vol. 78(4), pages 1242-1264, April.
    5. Davide Vannoni, 1999. "Empirical Studies of Vertical Integration: the Transaction Cost Orthodoxy," CERIS Working Paper 199903, CNR-IRCrES Research Institute on Sustainable Economic Growth - Torino (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY.
    6. Martinez, Steve & Zering, Kelly, 1997. "Vertical Coordination and Consumer Welfare: The Case of the Pork Industry," Agricultural Economic Reports 262048, United States Department of Agriculture, Economic Research Service.
    7. Bhuyan, Sanjib, 2003. "What Determines Vertical Mergers in U.S. Food Manufacturing Industries?," 2003 Annual meeting, July 27-30, Montreal, Canada 22146, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Martinez, Stephen W., 2002. "Vertical Coordination Of Marketing Systems: Lessons From The Poultry, Egg, And Pork Industries," Agricultural Economic Reports 34051, United States Department of Agriculture, Economic Research Service.
    9. René Aïd & Gilles Chemla & Arnaud Porchet & Nizar Touzi, 2011. "Hedging and Vertical Integration in Electricity Markets," Management Science, INFORMS, vol. 57(8), pages 1438-1452, August.
    10. Adnan Haider Bukhari & Safdar Ullah Khan, 2008. "A Small Open Economy DSGE Model for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 963-1008.
    11. Yuriy Gorodnichenko & Viacheslav Sheremirov & Oleksandr Talavera, 2018. "Price Setting in Online Markets: Does IT Click?," Journal of the European Economic Association, European Economic Association, vol. 16(6), pages 1764-1811.
    12. Fernando Alvarez & Francesco Lippi & Juan Passadore, 2017. "Are State- and Time-Dependent Models Really Different?," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 379-457.
    13. Kevin X. D. Huang & Zheng Liu, 2004. "Multiple stages of processing and the quantity anomaly in international business cycle models," Working Papers 04-8, Federal Reserve Bank of Philadelphia.
    14. DI BARTOLOMEO, Giovanni & SERPIERI, Carolina, 2023. "Optimal monetary policy and the vintage-dependent price and wage Phillips curves: An international comparison," Working Papers 2023004, University of Antwerp, Faculty of Business and Economics.
    15. Sheedy, Kevin D., 2010. "Intrinsic inflation persistence," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1049-1061, November.
    16. Fang, Debin & Wang, Pengyu, 2023. "Optimal real-time pricing and electricity package by retail electric providers based on social learning," Energy Economics, Elsevier, vol. 117(C).
    17. Musy, Olivier, 2006. "Inflation persistence and the real costs of disinflation in staggered prices and partial adjustment models," Economics Letters, Elsevier, vol. 91(1), pages 50-55, April.
    18. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    19. Froyen, Richard T & Waud, Roger N, 1988. "Real Business Cycles and the Lucas Paradigm," Economic Inquiry, Western Economic Association International, vol. 26(2), pages 183-201, April.
    20. Christian Gambardella & Michael Pahle & Wolf-Peter Schill, 2016. "Do Benefits from Dynamic Tariffing Rise? Welfare Effects of Real-Time Pricing under Carbon-Tax-Induced Variable Renewable Energy Supply," Discussion Papers of DIW Berlin 1621, DIW Berlin, German Institute for Economic Research.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:ijecbs:v:24:y:2017:i:1:p:53-72. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/CIJB20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.