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Vertical restraints and horizontal control

Author

Listed:
  • Robert Innes
  • Stephen F. Hamilton

Abstract

This article considers vertical restraints in a setting in which duopoly retailers each sell more than one manufactured good. Vertical restraints by a dominant manufacturer enable the firm to acquire horizontal control over a competitively supplied retail good. The equilibrium contracts produce symptoms that are consistent with a variety of observed retail practices, including slotting fees paid to retailers by competitive suppliers, loss leadership, and predatory accommodation with below-cost manufacturer pricing for the dominant brand(s). Applications are developed for supermarket retailing, where the manufacturer of a national brand seeks to control the retail pricing of a supermarket's private label, and for convenience stores, where a gasoline provider seeks to control the retail pricing of an in-store composite consumption good. Copyright (c) 2009, RAND.

Suggested Citation

  • Robert Innes & Stephen F. Hamilton, 2009. "Vertical restraints and horizontal control," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 120-143.
  • Handle: RePEc:bla:randje:v:40:y:2009:i:1:p:120-143
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1756-2171.2008.00058.x
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    References listed on IDEAS

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    1. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, pages 299-308.
    2. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, pages 97-109.
    3. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
    4. Nicholas Economides, 2001. "The Microsoft Antitrust Case," Journal of Industry, Competition and Trade, Springer, pages 7-39.
    5. W. Bentley MacLeod & James M. Malcomson, 1995. "Contract Bargaining with Symmetric Information," Canadian Journal of Economics, Canadian Economics Association, vol. 28(2), pages 336-367, May.
    6. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-370, July.
    7. Nicholas Economides, 2001. "The Microsoft Antitrust Case," Journal of Industry, Competition and Trade, Springer, pages 7-39.
    8. Innes, Robert & Hamilton, Stephen F., 2006. "Naked slotting fees for vertical control of multi-product retail markets," International Journal of Industrial Organization, Elsevier, pages 303-318.
    9. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, pages 27-38.
    10. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 265-297, October.
    11. Patrick Rey & Jean Tirole, 1985. "The Logic of Vertical Restraints," Working papers 396, Massachusetts Institute of Technology (MIT), Department of Economics.
    12. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, pages 837-859.
    13. Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 283-298, March.
    14. Bruce W. Marion, 1998. "Changing power relationships in US food industry: Brokerage arrangements for private label products," Agribusiness, John Wiley & Sons, Ltd., vol. 14(2), pages 85-93.
    15. Rey, Patrick & Tirole, Jean, 1986. "The Logic of Vertical Restraints," American Economic Review, American Economic Association, pages 921-939.
    16. Patrick Bolton & Giacomo Bonanno, 1988. "Vertical Restraints in a Model of Vertical Differentiation," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 555-570.
    17. Leslie M. Marx & Greg Shaffer, 1999. "Predatory Accommodation: Below-Cost Pricing without Exclusion in Intermediate Goods Markets," RAND Journal of Economics, The RAND Corporation, pages 22-43.
    18. Reiffen, David, 1999. "On the equivalence of resale price maintenance and quantity restrictions," International Journal of Industrial Organization, Elsevier, pages 277-288.
    19. Innes, Robert & Hamilton, Stephen F., 2006. "Naked slotting fees for vertical control of multi-product retail markets," International Journal of Industrial Organization, Elsevier, pages 303-318.
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    Citations

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    Cited by:

    1. Rey, Patrick & Verge, T., 2016. "Secret contracting in multilateral relations," TSE Working Papers 16-744, Toulouse School of Economics (TSE), revised Jul 2017.
    2. Gabrielsen, Tommy Staahl & Johansen, Bjørn Olav, 2013. "Resale Price Maintenance And Up-Front Payments: Achieving Horizontal Control Under Seller And Buyer Power," Working Papers in Economics 02/13, University of Bergen, Department of Economics.
    3. Tommy Staahl Gabrielsen & Bjørn Olav Johansen, 2017. "Resale Price Maintenance with Secret Contracts and Retail Service Externalities," American Economic Journal: Microeconomics, American Economic Association, pages 63-87.
    4. Hamilton, Stephen F. & Bontems, Philippe & Lepore, Jason, 2015. "Oligopoly intermediation, relative rivalry and market conduct," International Journal of Industrial Organization, Elsevier, pages 49-59.
    5. Masuda, Takehito & Okano, Yoshitaka & Saijo, Tatsuyoshi, 2014. "The minimum approval mechanism implements the efficient public good allocation theoretically and experimentally," Games and Economic Behavior, Elsevier, pages 73-85.
    6. repec:eee:ecolet:v:158:y:2017:i:c:p:34-36 is not listed on IDEAS
    7. repec:kap:jeczfn:v:121:y:2017:i:3:d:10.1007_s00712-017-0529-5 is not listed on IDEAS
    8. Gabrielsen, Tommy S. & Johansen, Bjørn Olav & Lømo, Teis L., 2015. "Resale price maintenance in two-sided markets," Working Papers in Economics 08/15, University of Bergen, Department of Economics.
    9. Hamilton, Stephen & Innes, Robert, 2017. "Slotting allowances and retail product variety under oligopoly," Economics Letters, Elsevier, pages 34-36.

    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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