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Some empirical regularities on vertical restraints

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  • Xulia González
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    Abstract

    Vertical restraints most often arise when an upstream firm wants to restrict the choices of a downstream distributor in order to increase profits. The aim of this paper is to analyze some empirical regularities in the motivations for vertical restraints. Firstly a simple theoretical framework is developed in which an upstream monopoly decides on the intermediate price and an effort level which increase consumer demand, while the distributor decides on the final price. Two externalities arises: the double marginalization and a positive vertical externality due to the effort. The main result of the model indicates that the incentives to vertical coordination are higher when upstream firm make sales effort. Secondly, we test this theoretical prediction with a sample of more than 2000 Spanish manufacturing firms that report detailed information on firms’ distribution system and the type of vertical restraints that they impose to their distributors. The main results indicate that the greater the effort put in the upstream firm, the higher the probability of imposing vertical restraints. Furthermore, there is an important heterogeneity by industry and size in the probability to impose vertical restraints.

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    Bibliographic Info

    Paper provided by Universidade de Vigo, Departamento de Economía Aplicada in its series Working Papers with number 0607.

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    Length: 33 pages
    Date of creation: Oct 2006
    Date of revision:
    Handle: RePEc:vig:wpaper:0607

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    Related research

    Keywords: vertical restrictions; vertical integration; manufacturing sector.;

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    1. 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.
    2. Patrick Rey & Thibaud Verge, 2002. "Resale Price Maintenance and Horizontal Cartel," The Centre for Market and Public Organisation 02/047, Department of Economics, University of Bristol, UK.
    3. Huergo, Elena & Jaumandreu, Jordi, 2004. "Firms' age, process innovation and productivity growth," International Journal of Industrial Organization, Elsevier, vol. 22(4), pages 541-559, April.
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