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Vertical Limit pricing

Author

Listed:
  • Aggey Semenov

    (Department of Economics, University of Ottawa, Ottawa, ON)

  • Julian Wright

    (Department of Economics, National University of Singapour)

Abstract

A new theory of limit pricing is provided which works through the vertical contract signed between an incumbent manufacturer and a retailer. We establish conditions under which the incumbent can obtain full monopoly profits, even if the potential entrant is more efficient. A key feature of the optimal vertical contract we describe is quantity discounting, typically involving three-part incremental-units or all-units tariffs, with a marginal wholesale price that is below the incumbent’s marginal cost for sufficiently large quantities.

Suggested Citation

  • Aggey Semenov & Julian Wright, 2011. "Vertical Limit pricing," Working Papers 1104E, University of Ottawa, Department of Economics.
    • Handle: RePEc:ott:wpaper:1104e
    as

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    File URL: http://sciencessociales.uottawa.ca/economics/sites/socialsciences.uottawa.ca.economics/files/1104E.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    limit pricing; vertical contracts; multi-part tariffs.;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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