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Raising Retailers' Profits: On Vertical Practices and the Exclusion of Rivals

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  • John Asker
  • Heski Bar-Isaac

Abstract

Resale price maintenance (RPM), slotting fees, loyalty rebates, and other related vertical practices can allow an incumbent manufacturer to transfer profits to retailers. If these retailers were to accommodate entry, upstream competition could lead to lower industry profits and the breakdown of these profit transfers. Thus, in equilibrium, retailers can internalize the effect of accommodating entry on the incumbent's profits. Consequently, if entry requires downstream accommodation, entry can be deterred. We discuss policy implications of this aspect of vertical contracting practices.

Suggested Citation

  • John Asker & Heski Bar-Isaac, 2014. "Raising Retailers' Profits: On Vertical Practices and the Exclusion of Rivals," American Economic Review, American Economic Association, vol. 104(2), pages 672-686, February.
    • Handle: RePEc:aea:aecrev:v:104:y:2014:i:2:p:672-86
    Note: DOI: 10.1257/aer.104.2.672
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    References listed on IDEAS

    as
    1. Zerbe, Richard, 1969. "The American Sugar Refinery Company, 1887-1914: The Story of a Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 12(2), pages 339-375, October.
    2. John Asker & Heski Bar-Isaac, 2010. "Exclusionary Minimum Resale Price Maintenance," NBER Working Papers 16564, National Bureau of Economic Research, Inc.
    3. Jeanine Miklós-Thal, 2011. "Optimal collusion under cost asymmetry," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(1), pages 99-125, January.
    4. Ralph Cassady, 1939. "Maintenance of Resale Prices by Manufacturers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 53(3), pages 454-464.
    5. David Genesove & Wallace P. Mullin, 2006. "Predation and its rate of return: the sugar industry, 1887–1914," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 47-69, March.
    6. Harrington, Joseph E, Jr, 1991. "The Determination of Price and Output Quotas in a Heterogeneous Cartel," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 767-792, November.
    7. David Genesove & Wallace Mullin, 2006. "Predation and Its Rate of Return: The Sugar Industry, 1887Ð1914," RAND Journal of Economics, The RAND Corporation, vol. 37(1), pages 47-69, Spring.
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    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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