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On the Welfare Effects of Exclusive Distribution Arrangements

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  • Eichberger, Jürgen
  • Mueller-Langer, Frank

Abstract

The regulation of vertical relationships between firms is the subject of persistent legal and academic controversy. The literature studying vertical trade relationships seems to assume that an upstream monopolist prefers downstream competition over exclusive distribution arrangements. We derive precise conditions for when an upstream monopolist prefers competing distribution systems over exclusive distribution in the downstream market. We also show that the welfare effects of downstream competition are ambiguous. A downstream oligopoly may have negative welfare properties compared to a downstream monopoly.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39691.

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Date of creation: 24 May 2012
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Handle: RePEc:pra:mprapa:39691

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Keywords: Exclusive distribution; Competing distribution; Vertical foreclosure; Cournot competition;

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  1. Matthias Lutz, 2004. "Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 456-475, 08.
  2. Durham, Yvonne, 2000. "An experimental examination of double marginalization and vertical relationships," Journal of Economic Behavior & Organization, Elsevier, vol. 42(2), pages 207-229, June.
  3. de Fontenay, Catherine C. & Gans, Joshua S. & Groves, Vivienne, 2010. "Exclusivity, competition and the irrelevance of internal investment," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 336-340, July.
  4. Martin Richardson, . "Trade Policy and Access to Retail Distribution," EPRU Working Paper Series 97-23, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  5. Saggi, Kamal & Vettas, Nikolaos, 1999. "On Intrabrand and Interbrand Competition: The Strategic Role of Fees and Royalties," CEPR Discussion Papers 2110, C.E.P.R. Discussion Papers.
  6. Maskus, Keith E. & Yongmin Chen, 2000. "Vertical price control and parallel imports - theory and evidence," Policy Research Working Paper Series 2461, The World Bank.
  7. Ehrlich Everett M. & Eisenach Jeffrey A. & Leighton Wayne A., 2010. "The Impact of Regulation on Innovation and Choice in Wireless Communications," Review of Network Economics, De Gruyter, vol. 9(1), pages 1-51, February.
  8. Baye, Michael R & Crocker, Keith J & Ju, Jiandong, 1996. "Divisionalization, Franchising, and Divestiture Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 86(1), pages 223-36, March.
  9. Polasky, Stephen, 1992. "Divide and conquer On the profitability of forming independent rival divisions," Economics Letters, Elsevier, vol. 40(3), pages 365-371, November.
  10. Spiegel, Yossi & Yehezkel, Yaron, 2003. "Price and non-price restraints when retailers are vertically differentiated," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 923-947, September.
  11. Justine S. Hastings & Richard J. Gilbert, 2005. "MARKET POWER, VERTICAL INTEGRATION AND THE WHOLESALE PRICE OF GASOLINE -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 53(4), pages 469-492, December.
  12. Ganslandt, Mattias & Maskus, Keith E., 2005. "Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets," Working Paper Series 639, Research Institute of Industrial Economics.
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