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The Economic Theory of Retail Pricing: A Survey

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  • Oana Secrieru

Abstract

The types of contracts that arise in a typical vertical manufacturer–retailer relationship are more sophisticated than usually assumed in standard macroeconomic models. In addition to setting per-unit prices, manufacturers and retailers revert to non-linear pricing and non-price instruments. These instruments or contracts are referred to as vertical restraints and can take the form of franchise fees, resale-price maintenance, exclusive dealing, exclusive territories, and slotting allowances. The use and the effects of one type of instrument versus another depend crucially on specific market assumptions upstream and downstream and on the division of bargaining power between manufacturers and retailers. The author surveys the industrial organization literature on retail pricing and shows that vertical restraint instruments have important effects on producer and consumer prices, market structure, efficiency, and welfare. Some potentially important macroeconomic implications of vertical restraints are suggested.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 04-8.

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Length: 45 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:bca:bocawp:04-8

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Keywords: Market structure and pricing;

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  1. B. Douglas Bernheim & Michael D. Whinston, . "Exclusive Dealing," Working Papers 96008, Stanford University, Department of Economics.
  2. Robert Amano & Scott Hendry, 2003. "Inflation persistence and costly market share adjustment: a preliminary analysis," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 134-146 Bank for International Settlements.
  3. Backhaus,Jurgen G & Hansen ,Reginald, 2000. "Resale Price Maintenance for Books in Germany and the European Union: A Legal and Economic Analysis," Research Memorandum 002, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. 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.
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