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Vertical Restraints in a Model of Vertical Differentiation

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  • Patrick Bolton
  • Giacomo Bonanno

Abstract

We consider the case of a manufacturer who sells a homogeneous good to retailers who compete in prices and "cum-sales" or "post-sales" services. We show that the optimal linear-price contract is inefficient from the point of view of the vertical structure and that simple forms of vertical restraints, such as resale price maintenance and franchise fees, dominate the optimal linear-price contract, but do not restore vertical efficiency. Our analysis is concluded with the description of an efficient contract.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:qjecon:v:103:y:1988:i:3:p:555-570.
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    File URL: http://hdl.handle.net/10.2307/1885545
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    Citations

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    Cited by:

    1. 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.
    2. Yossef Spiegel & Yaron Yehezkel, 2000. "Price and Non-Price Restraints When Retailers are Vertically Differentiated," Econometric Society World Congress 2000 Contributed Papers 1670, Econometric Society.
    3. Moner-Colonques, Rafael, 2006. "The tradeoffs between retail service and exclusivity in distribution: Welfare and policy implications," International Review of Law and Economics, Elsevier, vol. 26(2), pages 241-261, June.
    4. Tian Xia & Richard Sexton, 2010. "Brand or Variety Choices and Periodic Sales as Substitute Instruments for Monopoly Price Discrimination," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(4), pages 333-349, June.
    5. Dulleck, Uwe & Kerschbamer, Rudolf, 2009. "Experts vs. discounters: Consumer free-riding and experts withholding advice in markets for credence goods," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 15-23, January.
    6. Miao, Chun-Hui, 2018. "Excessive Search," MPRA Paper 85818, University Library of Munich, Germany.
    7. Oana Secrieru, 2004. "The Economic Theory of Retail Pricing: A Survey," Staff Working Papers 04-8, Bank of Canada.
    8. Robert Innes & Stephen F. Hamilton, 2009. "Vertical restraints and horizontal control," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 120-143.
    9. Frank Mathewson & Ralph Winter, 1998. "The Law and Economics of Resale Price Maintenance," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(1), pages 57-84, April.
    10. Dulleck, Uwe & Kerschbamer, Rudolf, 2005. "Experts vs Discounters: Competition and Market Unravelling When Consumers Do Not Know What they Need," CEPR Discussion Papers 5242, C.E.P.R. Discussion Papers.
    11. Hsiu-Li Chen, 2009. "Gray Marketing: Does It Hurt the Manufacturers?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(1), pages 23-35, March.
    12. Hsiu-Li Chen, 2002. "Gray marketing and unfair competition," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(2), pages 196-204, June.
    13. Kenji, Matsui, 2011. "Resale price maintenance for supply chains distributing products with demand uncertainty," International Journal of Production Economics, Elsevier, vol. 134(2), pages 375-387, December.

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